Country Profile 2006

Nepal

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Symbols for tables “n/a” means not available; “–” means not applicable

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Comparative economic indicators, 2005

Gross domestic product Gross domestic product per head (US$ bn) (US$ ’000)

China 2,224.9 China

India Bhutan (a)

Pakistan India

Bangladesh Pakistan

Nepal (a) 6.7 Mongolia (a)

Mongolia (a) 1.5 Bangladesh

Bhutan (a) 0.7 Nepal (a)

0 200 400 600 800 1,000 0.0 0.5 1.0 1.5 2.0 (a) 2004 (a) 2004 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices (% change, year on year) (% change, year on year)

Mongolia (a) Mongolia (a)

China Pakistan

India Bangladesh

Pakistan Bhutan (a)

Bhutan (a) India

Bangladesh Nepal (a)

Nepal (a) China

024681012 024681012 (a) 2004 (a) 2004 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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Contents

Nepal

3 Basic data

4 Politics 4 Political background 5 Recent political developments 10 Constitution, institutions and administration 11 Political forces 14 International relations and defence

16 Resources and infrastructure 16 Population 17 Education 18 Health 19 Natural resources and the environment 19 Transport, communications and the Internet 22 Energy provision

23 The economy 23 Economic structure 24 Economic policy 26 Economic performance

27 Economic sectors 27 Agriculture 28 Mining and semi-processing 29 Manufacturing 29 Construction 30 Financial services 31 Other services

32 The external sector 32 Tra d e i n go od s 33 Invisibles and the current account 33 Capital flows and foreign debt 34 Foreign reserves and the exchange rate

35 Regional overview 35 Membership of organisations

37 Appendices 37 Sources of information 38 Reference tables 38 Population 38 Energy consumption 39 Government finances 39 Gross domestic product at factor cost 39 Gross domestic product by expenditure

40 Gross domestic product by sector 40 Consumer prices, national data 40 Money supply and interest rates 41 Production index of manufacturing industries 41 To u r i s m 42 Foreign trade 43 Balance of payments, IMF series 43 External debt, World Bank series 44 Foreign reserves 44 Exchange rates

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Nepal

Basic data

Land area 147,181 sq km

Population 26.59m (2004)

Main towns Population in ‘000, 2001 estimates (Central Bureau of Statistics) Kathmandu (capital) 671.8 Biratnagar 166.6 Birgunj 112.4 Lalitpur 162.9 Pokhara 156.3

Climate Temperate (cool with extreme cold at high altitudes)

Weather in Kathmandu Hottest month, July, 20-29°C (average daily minimum and maximum); coldest (altitude 1,337 metres) month, January, 2-23°C; driest month, December, 3 mm average rainfall; wettest month, July, 373 mm average rainfall

Languages Nepali (official). There are other languages, and English is widely used in commerce

Measures Metric system; local units also used include 1 seer=0.933 kg; 1 maund=40 seer; 1 ropani=0.05087 ha; 1 bigha= 0.6773 ha

Currency Nepali rupee (NRs)=100 paisa. Effectively pegged since 1993 to the Indian rupee at a rate of NRs1.6:Rs1. Annual average exchange rate in 2005: NRs71.4:US$1. Exchange rate on April 19th 2006: NRs72.4: US$1

Fiscal year July 16th-July 15th

Time 5 hours 45 minutes ahead of GMT

Public holidays in 2006 National Unity Day, January 11th; Vasant Panchami, February 2nd; Martyrs! Day, January 29th; National Democracy Day, February 19th; Shivaratri, February 26th; Holi, March 14th; Women’s Day, March 8th (women only), Ghodejatra (Kathmandu Valley), March 29th; Solar eclipse, March 19th; Chaite Dashain, April 5th; Birthday of Lord Ram, April 7th; Nepali New Year, April 14th; Buddha’s birthday, May 13th; King Gyanendra’s birthday, July 7th; Rakshya Bandhan, August 9th; Festival of cows, August 10th (Kathmandu Valley); Krishna’s birthday, August 16th; Teej (women only), August 26th; Rishi Panchami (women only), August 28th; Indrajatra (Kathmandu Valley), September 6th; Ghatasthapana, September 23rd; Dasai, September 29th-October 7th; Festival of Lights, October 21st-24th; Constitution Day, November 9th; various regional holidays.

Politics

Nepal is going through the biggest political crisis in its history. A protracted war between the army-backed monarch, King Gyanendra, and Maoist rebels has already undermined the political system, severely damaged the economy, terrorised vast parts of the civilian population and affected relations with India and the West. Since late 2005 the three-way tussle has turned into a two-way fight between the monarch and his supporters and an emerging alliance of the seven main political parties and the Maoists. The violent insurgency led by the Maoist rebels first emerged in 1996 and has claimed over 13,000 lives. The Maoists’ ultimate aim, in theory, is to establish a “peasant-led revolutionary communist regime”. In practice, they want a new constitution written by members of a new constituent assembly that ends Nepal’s monarchy and establishes some form of republic. It is estimated that Maoists have strong influence in over two-thirds of the country.

The insurgency has been strengthened by the lack of a unified front to deal with it. Apart from the rebels, three key domestic players exist"the king, the political parties and the army. Politics has traditionally been unstable, with a number of shaky coalition governments collapsing frequently. Faced with this perpetual instability, in October 2002 the king suspended Nepal’s normal democratic procedures and began appointing prime ministers by royal decree. Going one step further, in what was widely referred to as a “royal coup”, on February 1st 2005 the king dismissed the prime minister and government, placed leading politicians under house arrest and declared a state of emergency. Since then, King Gyanendra has ruled directly as chairman of a council of ministers, appointed directly by him. The king had given himself three years to restore multiparty democracy. To date he has the strong support of the army. Nevertheless, the triangular, tense and unstable relationship between the king, the politicians and the Maoists make the future of Nepal highly uncertain.

Political background

The Gorkha principality The modern history of Nepal dates from the second half of the 18th century, unites Nepal when one of the many small hill principalities of the region, Gorkha, began to expand under the leadership of Prithivi Narayan Shah, conquering Kathmandu in 1768. By 1814 more than 75 principalities had succumbed to the Gorkha armies, bringing all of the sub-Himalayan hill areas between Bhutan in the east and the Sutlej river in the west under Gorkha’s control. Jung Bahadur Rana began gaining political control in 1846. He later extracted a decree from the king that left the monarchy with only nominal power and transferred all sovereign power to the Rana family, who ruled as hereditary prime ministers and presided over an isolationist regime that kept most Nepalis in dire poverty. The system lasted until 1950 when King Tribhuvan fled to India and sparked a revolt against Rana rule. King Tribhuvan returned to Nepal in January 1951 under an accord brokered by the Indian prime minister, Jawaharlal Nehru, that recognised the pre-eminent role of the monarch and legalised political parties. King Tribhuvan presided over the early trials of democracy but

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died in February 1955 before holding an election for a constituent assembly that was to write a new constitution for Nepal.

“Partyless democracy” His son King Mahendra (1955-1972) took charge while political parties developed and a constitution was drafted. The king issued a constitution in 1959, and the first democratic election for a national assembly was held that year, resulting in a victory for the Nepali Congress (NC) under Bishweshwar Prasad Koirala. However, on December 15th 1960 King Mahendra declared democracy a failure and dismissed the government. In 1962 he promulgated a new constitution establishing a new political structure to consolidate direct rule. This system banned political parties and created panchayats, or councils, at the village, district and national levels that advised the king, who regained absolute power. Protests against the panchayat system broke out in 1979, prompting King Birendra (1972-2001) to hold a referendum in 1980. Voters were asked to decide between reform of the panchayat system or the reintroduction of a multiparty system. A narrow majority voted in favour of a reformed panchayat system. Direct, but still non-party, elections to the 140-member National Panchayat (parliament) were held in 1981 and 1986.

A constitutional monarchy is In April 1990 the panchayat system collapsed. From February 1990 the re-established Movement for the Restoration of Democracy (MRD)"comprising the NC and the United Left Front (ULF, a coalition of seven communist factions)"had organised popular demonstrations that brought down the system. They were aided by an Indian economic blockade. The last panchayat prime minister, Lokendra Bahadur Chand, resigned on April 15th 1990, leading to the formation of an interim government. On November 9th 1990 King Birendra promulgated a new constitution, under which he became a constitutional monarch and multiparty democracy was guaranteed.

Coalition politics and The NC won a majority in the May 1991 election, but the first democratically instability begins elected prime minister in 30 years Girija Prasad Koirala of the Nepali Congress (NC) was forced to seek a new mandate after losing the support of dissidents within his own party in mid-1994. An election in November 1994 returned a hung parliament, in which the Communist Party of Nepal (Unified Marxist- Leninist), or CPN (UML), emerged as the largest party in parliament. The following five years saw five unstable and unproductive coalition governments. The NC won a majority in the third parliamentary election, held in May 1999. Krishna Prasad Bhattarai was prime minister for ten months before being toppled by Mr Koirala, who became prime minister for the fourth time in March 2000.

Recent political developments

In a bizarre incident, on June 1st 2001 Crown Prince Dipendra is believed to have shot dead his father, King Birendra, and nine other members of the royal family, including his mother, sister and brother in a fit of anger. Nevertheless, the official investigation into the palace massacre continues to be questioned by experts and the public. Prince Dipendra became king while in a

coma on June 2nd, but died from self-inflicted wounds the following day. King Gyanendra, King Birendra’s brother, was crowned on June 4th 2001 as the 13th king of the Shah dynasty. In the eyes of the public, he lacks the legitimacy of King Birendra, who was widely revered as the incarnation of the Hindu god, Vishnu. The current king is also hampered by the fact that his son, and heir to the throne, has a reputation for drunken thuggery.

The period of instability Continued factionalism in the NC caused Mr Koirala to resign on July 19th continues 2001. Sher Bahadur Deuba, who replaced Mr Koirala, announced a truce with the Maoists. The ceasefire with the Maoists collapsed in November 2001 following a series of failed talks. On November 26th 2001 the government declared a state of emergency and sent the military to disarm the rebels. In- fighting within the ruling NC continued, and Mr Deuba dissolved parliament in May 2002 after failing to win the support of his own party for another extension of the state of emergency. The interim government (which continued to be led by Mr Deuba) then extended the state of emergency, which was eventually lifted at end-August 2002. The government had planned to hold a general election in November 2002, but in early October Mr Deuba asked the king to postpone the election, citing security concerns.

Parliamentary government is Rather than take his advice, King Gyanendra dismissed Mr Deuba and his suspended in October 2002 elected government on October 4th 2002. Using powers under article 127 and 35 of the constitution, he appointed a government via a royal decree, which he asked to restore law and order, and to hold a general election. With this move, the king"temporarily it seemed"dismissed normal parliamentary democratic procedure (by which a democratically elected parliament appoints the prime minister). On October 11th 2002, despite opposition from other political parties, he named Mr Chand, now a leader of the National Democratic Party (NDP), as prime minister. The king appointed two more prime ministers, each serving for less than a year, before he began ruling directly in February 2005. Ten years of the Maoist insurgency

The Maoists entered the 11th year of their insurgency on February 13th 2006. They launched their “people’s war” to topple Nepal’s constitutional monarchy and establish a communist republic on February 13th 1996. By 2001 the rebels had a presence in all of Nepal’s 75 districts. They are strongest in the remote districts of mid- and far-west Nepal, where the insurgency was nurtured. Their extreme left-wing ideology connects with Nepal’s widespread poverty and associated social problems, such as exclusion resulting from entrenched caste- and class-based discrimination, political instability, corruption and poor governance.

The conflict has matured from what was a low-intensity conflict until 2001, into a high-intensity one, with more than 1,000 deaths every year. Nepal’s political equation turned into a three-way power tussle between King Gyanendra, the parliamentary parties and the Maoists in October 2002, when the king dismissed the elected government and appointed a prime minister of his own choosing. The equation changed on November 22nd 2005 when the seven political parties opposing the king’s direct rule reached an “understanding” with the Maoists to carry out separate, but co-ordinated, protests to end “absolute monarchy”. Since mid-November the political parties have been advocating the setting up of a democratic republic"a long-standing Maoist demand for a return to mainstream politics.

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Maoist doctrine In theory, the Maoists would like to establish a communist peasant-led regime. In practice, they want a new constitution written by members of a new constituent assembly that ends Nepal’s royal system and establishes a republic. Since mid- October 2005 the rebels have said they would agree to multiparty competition in a “democratic republic”, though there are doubts if they would keep their word if they were to win over the army and come to power.

The Maoists model themselves on Peru’s “Shining Path” guerrillas. Chinese communists view their doctrine as a perversion of true Maoist thought and China has distanced itself from their thinking. Nepali Maoists remain brutally violent, arguing that the “ends justify the means”. Although they have some legitimate supporters, much of their following is believed to have expanded largely via extortion and blackmail.

In a rare public relations offensive, Comrade Prachanda, one of the two main leaders of the Maoist movement, gave several face-to-face interviews to the media in early 2006. He said the reason why the Maoists reached an “understanding” with political parties was their realisation of the need to take over Kathmandu both militarily and politically. It was his first public appearance since he went into hiding in 1981. He also repeated his party’s new line to accept multiparty competition. Prachanda said that Nepal would be a democratic republic “within five years” and that his party would agree to involve the United Nations in efforts to find a political resolution and oversee eventual disarmament. The death toll The death toll between February 13th 1996 and March 12th 2006 reached 13,190. The number of deaths escalated during the state of emergency between November 2001 and August 2002, and has remained high except for the lull during the ceasefire from end-January 2003 to end-August 2003. According to a local human rights group, the Informal Sector Service Centre (which has the most up-to-date statistics on the conflict), up to March 12th 2006 the “state” had killed 8,457 and “non-state” groups had killed 4,733. Maoists edge closer to the political parties The royal takeover on February 1st 2005 has widened the gap between the constitutional political forces represented by the king and the political parties. The king’s failure to reach out to the parties caused the parties to move closer to the Maoists within a year of the institution of royal rule. Leaders of the seven main political parties held meetings with the Maoists in New Delhi in November 2005 and announced an “understanding” to intensify separate protests against the monarchy and to write a new constitution by electing a constituent assembly. The main features of the 12-point understanding are as follows: • Both sides would carry out separate (possibly co-ordinated) protests against “absolute monarchy” which they agreed was the main obstacle to peace and progress. • The parties want the protests to end in the restoration of parliament (dissolved in May 2002) and the formation of an all-party government that would negotiate with the Maoists on holding a constituent assembly election (to write a new statute). The Maoists want the protests to culminate in a national conference that would appoint an interim government (including them) that would hold the election. • Both sides agreed to abide by the verdict of the polls, and to involve the United Nations or another “dependable” third party to supervise the Royal Nepalese Army and the Maoist forces during the transition following the end of monarchy. • The Maoists agreed to re-join competitive politics (provided constituent assembly elections were held) and to uphold basic rights and democratic values thereafter. They also agreed to create an environment that was conducive to allowing people displaced by the conflict to return home. The parties and the Maoists met again in March 2006 and reiterated their commitment to the “understanding”. The new alliance between the Maoists and the parties has emerged as the greatest challenge to the monarchy. “Climb on the back and strike on the head” Since late 2005 the Maoists have been following a new policy “to climb on the back (of the enemy) and strike on its head” or to focus attacks on centres of power, including Kathmandu. They launched several attacks on security installations in the capital in early January 2006 and have continued raids on district administration centres in addition to enforcing localised

© The Economist Intelligence Unit Limited 2006 www.eiu.com Country Profile 2006 8 Nepal strikes and blockades. The alliance with the parties is a realisation that Kathmandu had to be won politically because a military victory in the city was not possible. The accord with the parties has given the Maoists political cover, but because they are armed, it has also given Western governments, particularly the US, reason to fear that they could turn against their unarmed allies once the immediate goal of toppling the monarchy is attained.

The parties intensify Seven of Nepal’s main parties have intensified opposition to direct royal rule opposition to royal rule installed on February 1st 2005. The seven"Nepali Congress (NC), Communist Party of Nepal (Unified Marxist-Leninist), 0r CPN (UML), Nepali Congress (Democratic), or NC(D), Jana Morcha Nepal, or People’s Front Nepal (PFN), Nepal Workers! and Peasants! Party (NWPP), Nepal Sadbhavana Party (Anandi- Devi), or NSP (A), and a collection of seven small communist groups"came together in mid-2005 to oppose the king’s actions. Together the seven controlled over 90% of seats in the last parliament. The NC, which was the strongest advocate of constitutional monarchy throughout its 50-year history, dropped the term “constitutional monarch” from its statute in September 2005. The NC-D followed suit in February 2006. The communist parties in the alliance have always had the formation of a republic as their ultimate goal. The seven parties are demanding the restoration of “full” democracy or a system that would have no place for the monarch. They also openly advocate holding a constituent assembly election, as do the Maoists.

King fails to consolidate King Gyanendra reshuffled the cabinet twice during 2005 to include more party his power dissidents and royalists. He spent much of the year touring the country in what appeared to be a planned public-relations exercise. State-run television accompanied him during the visits and showed him intermingling with crowds, signing autographs and talking to ordinary people"all new to the Nepali monarchy. In an exercise apparently to consolidate royal rule, the government held elections in 58 municipalities on February 8th 2006. The result, however, turned out to be a no-confidence vote in the regime. Only 21% (of eligible voters) turned out to vote, compared with 66% in the 1999 general election and 63% in the 1997 local elections. The boycott of the elections by the main political parties and intimidation by the Maoists were the main reasons for the poor turnout.

The royal government continues to restrict civil liberties, including press freedoms and the right to organisation. King Gyanendra also formed an anti- graft body with powers to investigate, hear and pass judgement on corruption cases, which had sentenced the former prime minister, Mr Deuba, to two years in jail in July 2005. (However, the Supreme Court annulled the anti-graft body on February 13th 2006, saying that it was unconstitutional and Mr Deuba was freed). The government enacted an ordinance to control the independent media in October 2005. But its efforts to enforce the controls were cut short by another Supreme Court interim decision asking it to hold back until hearings on a number of media-related litigations were over. In April 2006 the government made the anti-terrorism ordinance more stringent, including a clause allowing it to punish anyone establishing contact with the Maoists as “terrorists”. This was possibly aimed at discouraging contacts between the rebels and the political parties.

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The Maoists and main political The Maoists have gained what the king has lost politically. Nepal’s democratic

parties form an alliance parties that had fought the Maoists alongside the monarch since 1996 have now moved closer to the rebels. On November 22nd 2005 the two sides agreed to launch separate protests against the government, with the aim of toppling the monarchy and setting up a “democratic republic” through a new constitution written by a constituent assembly. The understanding has wide public support, but the inability of the Maoists to cease violence has caused Western governments, especially the US, to be wary about the ultimate rebel goals. In November the Maoists also agreed to join competitive politics and respect democratic values and human rights and the parties agreed to hold constituent assembly elections to write a new constitution for a democratic republic.

The political battle lines have King Gyanendra’s takeover on February 1st 2005 did help to slow down the sharpened Maoist military onslaught but it also provided the Maoists room to gain politically. The anti-party stance of the king and his government caused the parties to drift away from the monarch. The army remains the most elusive player in the current crisis. Traditionally fiercely loyal to the king, it retains its loyalties to this day. Nevertheless, it could emerge as a more independent player and could play an important role in managing a political transition. Important recent events

2001 A shoot-out at the royal palace on June 1st leaves King Birendra and nine members of the royal family dead. Crown Prince Dipendra is said to have killed them before shooting himself, although exact details of the event remain shrouded in mystery. The late king’s brother, Gyanendra, was enthroned on June 4th. Sher Bahadur Deuba becomes the new prime minister on July 22nd. In November the government declares a state of emergency. 2002 King Gyanendra suspends the 1990 constitution in October and begins appointing prime ministers via a royal executive order. He dismisses Mr Deuba, and appoints Lokendra Bahadur Chand as prime minister. 2003 The Maoists and the government announce a ceasefire and hold two rounds of talks. Mr Chand resigns in May after failing to secure co-operation of five main parliamentary parties. The king appoints Surya Bahadur Thapa as prime minister in June. The government holds a further round of negotiations with the Maoists. The Maoists announce the end of the ceasefire on August 27th. 2004 Mr Thapa resigns in early May. The king appoints Mr Deuba, whom he had sacked from the same position in October 2002, as prime minister, giving him three tasks: to form a multi-party government, ensure peace and security, and hold elections before mid-April 2005.

2005 Mr Deuba is sacked again on February 1st. King Gyanendra assumes executive powers with the assistance of the military. He gives himself three years to restore peace and democracy. The cabinet includes two vice-chairmen: Dr Tulasi Giri (79) and Kirtinidhi Bista (80). Both Dr Giri and Mr Bista had assisted the king’s father, King Mahendra, to rule under the partyless panchayat regime that was overthrown in April 1990. 2006 One year of royal rule has polarised Nepali society into supporters of the monarchy and those that support the alliance between the Maoists and political parties, making a showdown inevitable unless the king yields to both domestic and international pressure for the restoration of democracy. Constitution, institutions and administration

The constitution remains Nepal’s 1990 constitution was effectively suspended in October 2002. Since suspended then, King Gyanendra has taken on executive authority and appointed three interim governments. The constitutional abeyance became more pronounced when, on February 1st 2005, King Gyanendra sacked the prime minister and decided to rule as chairman of the council of ministers. Until October 2002 the king was, according to some legal experts, still adhering to the constitution via invoking articles 127 and 35 of it. Actions on February 1st went beyond any constitutional provisos and amount to a clear violation of the constitution. Nepal’s constitution requires the prime minister to be an elected member of parliament (MP), and states that elected offices are to be filled within six months. A general election can fully activate the 1990 constitution, but polls remain postponed since November 2002. As an alternative, the parliamentary parties have been demanding that the king restore the parliament dissolved in May 2002 to restart democracy. The Maoist rebels are demanding the election of a constituent assembly to write a new constitution. Accepting such a demand would also mean ending Nepal’s constitutional monarchy"which the constitution says, is inalienable. Public opinion began swaying in favour of a constituent assembly election after the Maoists said in November 2005 that such an election would be a condition for their participation in party politics. Under the 1990 constitution, elections are supposed to be held every five years for the 205-member House of Representatives (the lower house of parliament). The full five-year term of the parliament elected in 1999 would have ended in 2004 had the legislature not been dissolved in May 2002. Under the constitution, the party with the majority of seats elects a leader, who is appointed prime minister by the king. The prime minister names the council of ministers appointed by the king. The National Assembly (the upper house of parliament) comprises 60 members, of whom 35 are elected by the lower house, 15 are elected by the heads of local and regional development committees (local government units) and ten are appointed by the king. Members serve staggered six-year terms. The upper house has the right to initiate bills (except finance bills) and to review,

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amend and reject bills passed by the lower house. The lower house may over- ride, by a simple majority vote, any action taken by the upper house. Under certain conditions the king may declare a state of emergency, but the lower house must ratify such a decision within three months. Nepal has not had a lower house since May 2002. Since February 1st 2005 King Gyanendra has held absolute power, even though, in theory, the constitution also remains in force.

A fairly independent judiciary Since 1990 the judiciary has often been called upon to interpret the constitution. Despite the extent to which politics pervades public life in Nepal, the judiciary has remained largely outside the political fray, although there are corruption allegations against the institution. Only parliament can impeach Supreme Court justices. The judiciary comprises 75 district, 16 appeals, one special court, four revenue tribunals, one administrative court, a labour court, one loan-recovery tribunal, a loan-recovery appeals tribunal and a Supreme Court.

On February 13th 2006 the Supreme Court annulled an anti-corruption commission appointed by the king on February 16th 2005. It said the commission, which had powers to investigate, prosecute and judge cases, was unconstitutional and ordered its dissolution. The court also overruled the convention of providing immunity to royal actions, saying that even decisions left to royal discretion can be challenged if they raise serious constitutional questions. The royal anti-corruption commission had sentenced the former prime minister, Sher Badahur Deuba, to two years in jail for corruption. He was freed subsequent to the verdict.

Political forces

Nepal has a handful of major national parties and some regional parties, all of which are plagued by factionalism and lack of institutional development.

The Nepali Congress The NC was established in 1947 in India, and many of its early leaders, including Bishweshwar Prasad Koirala (the prime minister from 1959 to 1960), had close ties with the Indian National Congress. The Koirala family still plays a dominant role in the party. The NC opposed rule by the Rana family in the late 1940s and also opposed the panchayat system. The NC was the natural party of government following the restoration of democracy in 1991, despite failing to develop a clear ideological identity. It advocates democratic socialism, but has also championed free-market liberalisation. A fault-line between supporters of two senior leaders, Girija Prasad Koirala (the younger brother of Bishweshwar Prasad Koirala and by this time the NC president) and Krishna Prasad Bhattarai, was a source of continuous infighting. The difference surfaced in May 2002, when Mr Deuba"the then prime minister and a protégé of Mr Bhattarai"was expelled from the party for disobeying a party order not to extend the state of emergency. Mr Deuba then tried to wrest control of the party from Girija Prasad Koirala, but in September the Election Commission ruled that the NC, led by Mr Koirala, could use the NC symbol in the election, which was originally due to be held in November 2002. Mr Deuba then set up a new, rival party, the Nepali Congress (Democratic) which has not been tested in elections.

The communist parties The parent Communist Party of Nepal (CPN) was established in the late 1940s, and Nepal now has an array of rival communist parties with similar names. The Communist Party of Nepal (Unified Marxist-Leninist), or CPN (UML), was formed in 1990 through the merger of the Communist Party of Nepal (Marxist- Leninist) and the Communist Party of Nepal (Marxist). Part of the CPN (UML) broke away in 1998 to form the CPN (Marxist-Leninist), but most members of this splinter group rejoined the CPN (UML) in February 2002 after the new party failed to win any seats in the 1999 election. The UML formed a minority government after the elections held in November 1994, when it had emerged as the largest party in parliament. It was a partner in the coalition government headed by Mr Deuba, which was dismissed on February 1st 2005. Main political figures

King Gyanendra Since February 1st 2005, King Gyanendra has assumed a role of both head of state and head of government. He sacked the prime minister and assumed executive powers in October 2002 and began ruling through prime ministers of choice. On February 1st 2005 he took full charge as the chairman of the council of ministers. Girija Prasad Koirala The president of the NC, Mr Koirala was prime minister in 1991-94, 1998-99 and from March 2000 to July 2001. Once a staunch anti-communist, he is now one of the most vocal leaders of the seven-party alliance and the anti-king protests. Mr Koirala (85) wields near total control over his party and remains one of the strongest personalities in Nepali politics. Sher Bahadur Deuba Mr Deuba was prime minister in 1995-97, July 2001-October 2002 and June 2004- February 1st 2005. He split from the NC in September 2002 to form a new party, the Nepali Congress (Democratic). His party has not been tested in an election. Comrade Prachanda and Baburam Bhattarai The two are top leaders of the Maoist movement. Prachanda is the party chairman and Mr Bhattarai is a central ideologue. They played a role alongside mainstream parties in transforming Nepal from an absolute monarchy to a constitutional one in the early 1990s prior to becoming revolutionaries. They are believed to have strong differences, both personal and political. A discord that became public in 2005 is now said to have been resolved. Surya Bahadur Thapa One of Nepal’s longest-serving politicians; was prime minister from June 2003 until end-May 2004. He served as chairman of the king’s council of ministers in 1965 and as prime minister in 1979, 1981, 1998 and 2003. The founder president of National Democratic Party (NDP), he quit the party in 2004 and set up a new party, Rastriya Janashakti Party (RJP), in March 2005.

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Madhav Kumar Nepal The general secretary of the Communist Party of Nepal (Unified Marxist-Leninist), or CPN (UML), Mr Nepal was deputy prime minister from December 1994 to September 1995. He was re-elected as general secretary of the CPN (UML) for five years in February 2002. He was held under house arrest from January 19th 2006 and shifted to formal detention on March 23rd 2006. The Maoists Puspa Kamal Dahal, who goes by the nom de guerre of Comrade Prachanda, is the chairman of the Communist Party of Nepal (Maoist), or CPN-M. He became chairman of the party in February 2001, and also presides over the party’s central military commission. The party’s other influential leader is a former architect, Baburam Bhattarai, who was previously president of the United People’s Front of Nepal (UPFN), a leftist party that took part in elections in 1990. He heads the rebel United Revolutionary People’s Council, the Maoists’ equivalent of a central government. Estimates of the core rebel fighting force vary from 7,000 to 10,000, but the numbers are impossible to verify. According to a February 8th 2005 estimate of the Royal Nepalese Army spokesman, the Maoists have 6,000-7,000 combatants, a militia of 25,000 and 100,000 sympathisers. Differences between Prachanda and Mr Bhattarai that surfaced in early 2005 are now said to have been resolved.

Other parties Composed of politicians from the panchayat system, the National Democratic Party (NDP) played the role of kingmaker in the 1994-99 hung parliament. In 1998 it split into two factions, the NDP (Thapa), led by Surya Bahadur Thapa, and the NDP (Chand), led by Lokendra Bahadur Chand. The NDP (Thapa) emerged as the third-largest party after the May 1999 election, but the NDP (Chand) failed to win a seat. Part of the NDP (Chand) then rejoined the NDP (Thapa). Mr Thapa, who led the NDP since its inception, stepped down on December 17th 2002, and Pashupati Sumsher Rana"a member of the Rana family that ruled Nepal as hereditary prime ministers before 1950"became its new president. The king picked two interim prime ministers from the NDP after dismissing the elected prime minister in October 2002. Mr Thapa dissociated himself from the NDP in late 2004 and formed a new party, Rastriya Janashakti Party (RJP), in March 2005. In early 2006 a faction of the RPP supportive of the royal takeover announced the formation of a new party led by Kamal Thapa, who was appointed Home Minister in December 2005. Smaller parties, such as the Nepal Workers’ and Peasants’ Party (NWPP), the Jana Morcha Nepal (People’s Front Nepal) and the Nepal Sadbhavana Party (NSP), have been more or less irrelevant to the power equations. However, the NSP has considerable influence in the plains bordering India, and was elected to parliament in every election since 1990. The NSP also has two factions, one is led by Badri Mandal, a minister in the king’s post-February 2005 cabinet. The other faction, NSP (Anandi Devi) is a member of the seven-party alliance that opposes direct royal rule. Nepal also has about a dozen minor communist groupings.

Election results (elections held on Nov 15th 1994 & May 3rd-17th 1999) 1994 1999 No. of votes % of total No. of seats % of total No. of votes % of total No. of seats % of total Nepali Congress 2,545,287 33.4 83 40.5 3,214,086 36.1 113 54.1 CPN (UML)a 2,352,601 30.9 88 42.9 2,734,568 30.7 68 34.6 NDPb 1,367,148 17.9 20 9.8 902,328 10.1 12 5.4 NSPc 265,847 3.5 3 1.5 278,435 3.1 5 2.4 PFNd 100,285 1.3 0 0.0 74,669 0.8 1 0.9 NPFe – – – - 121,426 1.4 5 0.5 NWPPf 75,072 1.0 4 1.9 48,685 0.6 1 0.5 NDP (Chand)g – – – - 295,812 3.3 0 0.0 Independents 471,324 6.7 7 3.4 251,930 2.8 0 0.0 Total incl others 7,625,348 100.0 205 100.0 8,618,896 100.0 205 100.0 a Communist Party of Nepal (Unified Marxist-Leninist). b National Democratic Party; NDP (Thapa) in 1999. c Nepal Sadbhavana Party. d People’s Front Nepal (previously Joint People’s Front). e National People’s Front. f Nepal Workers’ and Peasants’ Party. g National Democratic Party (Chand). Source: Election Commission.

International relations and defence

A minnow between regional Nepal’s position, sandwiched between two regional powers, India and China, giants obliges it to conduct its external relations pragmatically. A policy of non- alignment"globally as well as regionally"has persisted, but close historical links with India have made Nepal more susceptible to pressure from the south than the north. It is a member of the South Asian Association for Regional Co-operation (SAARC), which has its headquarters in Kathmandu. On February 8th 2004 Nepal obtained membership of the Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Co-operation (BIMST-EC) group. BIMST-EC was set up in 1997, and Nepal had been an observer at the forum since 1998. Nepal became a member of the World Trade Organisation on September 12th 2003.

India Relations with India revolve around the 1950 Peace and Friendship Treaty that gives India an advantageous position in security matters, investment and employment opportunities. Moreover, because Nepal is landlocked, it is vulnerable to Indian pressure when bilateral trade and transit agreements come up for renewal. Several trade and transit treaties have been agreed since 1989, as has a major treaty providing for joint development of the water resources of the Mahakali river. However, disputes over border demarcation have persisted for over 20 years, and there are new disagreements resulting from India’s construction of embankments near the border, which have caused inundation and flooding in Nepal. Nepal and India signed a preferential trade treaty in December 1996, which was amended in March 2002 (it should have been renewed automatically, but India requested a renegotiation of the origin rules and safeguards). Nepal’s transit treaty with India came up for renewal in January 2006. The treaty should have been renewed automatically, but was not, after India sought some changes. Nepal and India eventually agreed on treaty renewal on March 31st. The new treaty is valid until January 5th 2013. The renewal was possible

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after Nepal agreed to import goods that India deems “sensitive” from only seven of 15 transit points. Nepal also agreed to allow India to use Nepali highways to transport goods when needed.

China China has historically served as a counterweight to Indian influence, albeit with the severe limitations imposed by topography in the form of the Himalayan mountain range that separates the two countries. China supported the royalist regime in the early 1960s, whereas India backed armed raids by NC supporters from Indian territory. Nepal has a history of playing China against India between 1960 and the late 1980s, and a dispute in 1989 culminated in India closing all but one transit point to Nepal, after Nepal imported weapons from China. High-level visits in recent years have strengthened ties, and China has been a substantial aid provider. The Nepali government upholds the “One China” policy, which states that Taiwan is part of China. It also discourages political activity by Tibetan exiles within its territory. On January 21st 2005 Nepal ordered the closing down of the office of the representative of the Dalai Lama, which had been operating in Nepal since 1959 after the Dalai Lama fled from Tibet. China provided military supplies to Nepal in November 2005 after the US, the UK and India stopped such support. During the 13th SAARC summit in November 2005 Nepal (together with India) lobbied for China to be granted observer status, which was subsequently granted for the 14th summit.

The refugee problem Nepal has been hosting over 100,000 Bhutanese refugees (of Nepali origin) since the early 1990s. The refugees live in seven United Nations Refugees Agency (UNHCR)-run camps in east Nepal. Nepal and Bhutan have been trying to negotiate repatriation since the early 1990s, but there has been no progress, even though in March 2001 both countries began to verify the authenticity of refugees as a first step towards repatriation. India, through which the refugees travelled on their way to Nepal and have to travel through on their way back, has stayed out of the negotiations. The first asylum-seekers arrived in Nepal 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 their previous status. The repatriation of the refugees remains overshadowed by the political crisis in Nepal. Nepal also has a new and growing population of internally displaced people (IDPs), mainly villagers displaced by the Maoist insurgency in the countryside. According to the human rights group, Informal Sector Service Centre (INSEC), the number of people displaced by the conflict at end-2004 was 50,356. Other estimates put the number at between 100,000 and 200,000.

The military According to the International Institute for Strategic Studies, Nepal’s army numbers around 69,000. The size of the army has been growing steadily since it was deployed to fight the Maoists in 2001"local sources suggest that there were close to 80,000 soldiers at end-2005 and the army has plans to take its strength to 100,000. The army has a small air force of light aeroplanes and helicopters, but no combat aircraft. The police force is around 47,000-strong. The paramilitary Armed Police Force set up in 2001 has about 15,000 troops. Since 2002 India, the US and the UK had been supporting the military. India and the

UK suspended military aid after the February 2005 takeover by King Gyanendra. The military has traditionally been loyal to the king. However, this loyalty cannot be guaranteed and its role as a quasi-independent actor in the unstable political scene must be watched closely. Evidence of the military’s involvement in state affairs, albeit indirectly, began to appear in 2005. It has been alleged that it was the military that asked the government to control non-governmental organisation (NGO) activity and to ban news broadcasts on independent radio.

Armed forces, 2005 Army 69,000 Air wing 320 Paramilitary 62,000 Police force 47,000 Armed police force 15,000

Source: International Institute for Strategic Studies, The Military Balance 2005-2006.

Resources and infrastructure

Population

Rapid growth According to the 2001 national census, Nepal’s population was 23.2m, and included 102 different ethnic and caste groups. A later estimate published by the IMF puts the population at 26.6m in 2004. The national census shows that only 3.2m people lived in urban areas, and the population densities of Nepal’s 75 districts varied from 132 per sq km in Dadeldhura to 11,099 per sq km in the capital, Kathmandu. The average household size was 5.4 persons in 2001. In terms of geographical distribution, 7.3% of the population live in the mountain districts, 44.3% in the hill districts and 48.4% in the Terai, or plains, in the south. There is steady migration from the impoverished hill and mountain areas to the Kathmandu valley and the Terai region abutting India. The population grew at an annual average rate of 2.3% between 1991 and 2001 (the growth rate has been especially high in the Kathmandu valley, at an average of 4.7% a year), despite high rates of infant mortality (59 per 1,000 live births in 2004) and a low life expectancy at birth of just 62 years. Nepal’s urban population almost doubled between 1991 and 2001. According to the census, almost 80.6% of the population are Hindus, 10.7% are Buddhists, 4.2% are Muslims and 3.6% are Kiratis"a population group that previous censuses recorded as Hindus.

Population by age, 2001 Age range (years) Population (m) % of total 0-14 8.94 38.5 15-64 13.32 57.4 65 & over 0.94 4.1 Total 23.2 100.0

Source: Central Bureau of Statistics, Census 2001.

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Education

Slow progress The literacy rate for 15-year olds and above in the 2001 census was 48% (65% male and 42.4% female). Progress in education has been agonisingly slow, and the system remains patchy and of poor quality. The government is the major education provider, and in 2003/04 (mid-July to mid-July) around 66% of a total of 6.06m students were studying at the primary level. Nepal had 36,729 schools in 2004"24,746 primary, 7,436 lower secondary and 4,547 secondary schools. Education is a priority in the current Poverty Reduction Strategy Paper (PRSP), which is Nepal’s tenth five-year plan. Nepal had 5,919 private schools in 2003/04. These schools, which generally have higher teacher-student ratios and higher fees, were educating around 700,000 pupils. Males are more likely to receive an education: net female enrolment (grades 1-10) was around 56%, compared to 65% for males in 2003. The Education (Seventh Amendment) Act has been in force since 2002. Schools were reclassified as community schools, which receive government grants, and institutional schools, which are run by trusts or as private companies. In June 2002 the government began handing over school management to village and district development committees in an attempt to increase teacher accountability by making communities responsible for management. The government had handed over more than 2,200 schools to community management committees by early 2005. Its target is to have 8,000 schools (a third of the total) managed by communities by 2007. Since 2001 the education system has faced a new challenge from the Maoists, who are demanding free universal education and the nationalisation of private schools. The Maoists have also imposed a “tax” on teachers. The pro-Maoist student union, the All Nepal Free Students Union (Revolutionary), has threatened teachers and school authorities, and forced many private schools to close.

Primary schools remain a Successive governments have promised to make primary education free and government priority compulsory for all, but even today about 20% of all school-age children do not go to school. Many students never make it beyond primary level, and dropout rates are high. The Basic and Primary Education project, funded by a group of donors including the World Bank, the Asian Development Bank, the EU and bilateral donors, helped to raise net primary school enrolment from 57% to 72% between 1995/96 and 2003/04. The Education For All (EFA) programme 2004-09 has six major goals: expanding early childhood care, ensuring access to education, meeting the learning needs of all, reducing adult illiteracy, eliminating gender disparities and improving all aspects of educational quality.

Tertiary education Nepal has five universities. In 2004 it approved one more university, a Buddhist University to be set up at Lumbini, the Buddha’s birthplace. Nepal’s largest university, Tribhuvan University (TU), provides for the vast majority of undergraduates. In 2003/04 its 60 publicly funded campuses and 287 privately run affiliated campuses had a student body of 177,375 (64,647 in private colleges). The TU suffers from administrative chaos. The university’s student unions are highly politicised and classes are often disrupted by strikes. Nepal’s two other regular universities (Kathmandu University and Eastern University)

had a student body of 12,403 in 2003/04. (Data for Pokhara University were unavailable). The Mahendra Sanskrit University had 3,338 students.

Health

A multitude of problems Nepal scores poorly on virtually every public health indicator. According to UNICEF, life expectancy at birth was 62 years in 2004"one of the lowest in south Asia. The estimate for infant mortality (59 per 1,000 live births in 2004) represented an improvement from 165 per 1,000 in 1970 and 212 per 1,000 in 1960. The maternal mortality rate"one of the highest in the world"was 540 per 100,000 births in 2004. According to UNICEF data, 84% of the population had access to improved drinking water, and 27% of the people were using “adequate” sanitation facilities.

HIV/AIDS and tuberculosis are In 2004 the joint UN programme on HIV/AIDS, UNAIDS, classified Nepal as a major health problems country with a “concentrated epidemic”, particularly among injecting drug users (IDUs) and female sex workers. HIV prevalence among sex workers increased from 0.7% in 1992 to 17% in 2002 and that among IDUs reached 50%. According to UNAIDS, the “high” estimate for the number of people living with HIV/AIDS was 110,000 in 2003 (low estimate: 61,000). About 45% of Nepalis are believed to be infected with tuberculosis (TB), according to a 2002 study by the World Bank, and about 44,000 develop “active” TB every year, leading to 8,000-11,000 deaths a year. A TB prevention programme has been under way since 1996. According to UNICEF, in 2004 the percentage of one-year-olds immunised against TB was 85%, while that for DPT (diphtheria, pertussis and tetanus) and polio was 80% and for measles 73%. The percentage of one-year-olds immunised against hepatitis B was 87%, but only 42% of pregnant women had received tetanus injections in 2004. In 2003 only 32.8% of women had sought first-time health check-ups during pregnancy, and only 7.9% of pregnant women had received maternity services from skilled healthcare personnel.

The government is the main The government is the main institutional healthcare provider, but it does a healthcare provider woefully inadequate job. In early 2005 the government was running 87 hospitals (with 6,796 beds) and the public healthcare system comprised six healthcare centres, 699 healthcare posts, 3,132 sub-healthcare posts and 180 primary healthcare centres. The number of doctors employed by the government in 2004/05 was 1,259 and the number of nurses was 11,637. Hospitals and clinics charge on a fee-for-service basis, and most Nepalis have neither insurance nor the funds to pay for healthcare. The government spends about 6% of its budget (or about 1.5% of GDP) on healthcare. Nepal also has privately run hospitals, but most of them are located in urban centres, and the cost of seeking treatment there is beyond the reach of the majority of the population. Since the early 1980s village clinics have been supposed to supplement hospitals, by providing preventive and simple curative health services. It is unclear how many of these clinics are functional"the Maoist rebels have destroyed many of them and have scared away health workers. As part of its

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plan to involve communities in managing primary public healthcare institutions, the government had transferred 1,184 healthcare institutions to local government bodies by 2003/04. The plan is to transfer all primary public healthcare facilities to hospital management committees and local bodies by 2007.

Natural resources and the environment

A wide range of climates The topography of Nepal varies greatly. In the south are the plains of the Terai, where about 70% of Nepal’s cultivated land lies, and the forest-clad slopes of the lower hills, which rise to about 1,200 metres. In the central region there is a succession of mountains varying in height from 1,200 to 3,000 metres. The Himalayan region consists of mountains ranging from 3,000 metres to the 8,848-metre Mount Everest. Of Nepal’s 75 districts, 16 lie in the mountain region, 39 in the middle hills and 20 in the Terai. The mountains, hills and the Terai comprise 35%, 42% and 23% of the country’s land area, respectively. The forested area has declined over the past 30 years because of the extensive use of firewood as fuel, uncontrolled grazing, the clearance of land for cultivation and overexploitation of forests for commercial purposes. In 1994, 29% of the land area was forested. A 1993 policy giving ownership and management of forests to local communities has helped to slow the rate of deforestation. The number of these groups and the area of forest cover that they have helped to regenerate have increased every year since the introduction of the policy. Nepal had 5.8m ha of national forests in end-2005. The government is also implementing a programme to hand over degraded land to poor communities on long-term leases in 26 districts. Nepal has nine national parks (10,288 sq km), three wildlife reserves (979 sq km), three conservation areas (11,327 sq km), one hunting reserve (1,329 sq km) and eight buffer zones (3,469 sq km), which collectively cover 27,388 sq km or 18.6% of the country.

Transport, communications and the Internet

Roads Of Nepal’s 75 districts, 15 do not have roads suitable for motor vehicles to connect them with the rest of the country. The government had plans to link four more districts to the road network in 2004/05, but the target could not be met because of the poor security situation. In March 2004 Nepal had 17,182 km of roads, of which only 4,871 km was tarred. Most of Nepal’s roads are frequently washed away during the rainy season, and the hill and mountain trails are suitable only for pedestrians and pack animals. Nepal’s road-building is reliant on foreign aid. China built the highway linking Kathmandu with Kodari on the Chinese border in 1967, and a second road to China is also being built with Chinese aid. Much of Nepal’s main East-West Highway in the plains in the country’s south was built with Indian assistance. The government has major road-building projects in the country’s mid- and far-western regions, which also have the most intense conflict, and hence more work disruption. Nepal had 432,264 registered motor vehicles at end-2003/04, of which almost 63% were motorcycles and over 50% of all vehicles were based in the Kathmandu valley.

Railways A 5.3-km broad gauge railway connecting Nepal’s inland container depot in Birgunj with India’s rail network was completed in February 2001. Nepal and India signed a rail operation agreement in November 2003, and trains between the two countries began operating in mid-July 2004. The train is to transport cargo directly to the port in Calcutta, India. Nepal’s other rail line is a 51-km spur (of which 22 km are in Nepal) connecting Janakpur with Jayanagar in Bihar, India, was built in 1936. Nepal has asked India to help it to extend rail links to three more points in the country and to build an east-west railway along the southern plains.

Air Nepal has 47 airfields, of which 35 are suitable only for small aircraft. Only 12 of the airfields had paved runways in 2005, and 10 of the 47 airports were not in operation. Nepal had 36 air services agreements in 2005, but only 12 countries have direct air connections with Nepal. Tribhuvan International Airport (TIA) in Kathmandu is the only major airport. In 2005 TIA had 10,593 international landings and departures and handled around 1.13m international travellers. (The airport handled another 63,333 domestic landings and takeoffs and 1m domestic passengers) The airport handled 11.7 m kg of international freight (excluding mail) in 2005. Nepal has four domestic hubs, with reasonable facilities. Over 120 helipads help to provide access to many of the remote mountain areas. The national carrier, Royal Nepal Airlines Corporation (RNAC), is poorly run and overstaffed, and it has been almost completely displaced from the main domestic routes by private airlines (allowed since 1992) and by new carriers on international routes. The government plans to break up the corporation into separate companies handling domestic and international operations before it is privatised"something that has been discussed since the mid-1990s. Nepal had licensed 41 private airline companies in 2005, of which 16 were operational. One Nepali airline flies to New Delhi and Varanasi (India) and Dhaka (Bangladesh) and another two have international air operation certificates. In July 2005 Air Nepal International, another Nepali airline, began international flights to Bangkok and Dubai. The 1997 revision of the bilateral air agreement with India relieved some congestion and increased the weekly seating capacity on routes to the Indian capital, New Delhi, from 4,000 to 6,000. Two private Indian companies, Jet Air and Air Sahara, began scheduled passenger flights to Kathmandu in 2004.

Telecommunications Domestic and international telephone links are reliable but expensive. Much of the infrastructure was built with Japanese aid. In April 2002 India provided NRs13.4bn (US$175m) to build an “information superhighway” using fibre-optic cable. The first phase of the project"for laying 898 km of cables and connecting 79 exchanges"was completed in August 2004. Nepal has also requested India to support the laying down of another 950 km of fibre-optic cables and to build 55 more stations. (China is helping lay fibre-optic cables from Kathmandu to the Tibetan border). The state-owned Nepal Telecom (NT) had a capacity of 525,021 fixed lines, of which 433,631 were operational in mid-March 2005; it also had a backlog of

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321,583 applications. NT had distributed 248,829 mobile connections as of mid- July 2005 (173,175 pre-paid connections). Most fixed-line telephones have been installed in the Kathmandu valley and other urban centres; services elsewhere are patchy. According to the Nepal Telecommunications Authority (NTA) records, in July 2005 only 1,963 of the country’s 3,913 village development committees had at least one telephone connection. The Maoists have attacked many of the rural telephone systems and telecommunication towers. In theory, the telecoms sector has been liberalised, and licences for various services are auctioned to both private and government-owned firms. The sector is regulated by the NTA. NT!s monopoly was broken in September 2003 when United Telecom Limited (UTL), an Indian-invested company, began offering services in Kathmandu using wireless local-loop technology. In July 2005 UTL had distributed over 31,000 connections in the Kathmandu valley. The penetration rate (phones per 100 people) was 3.07% in mid-July 2005 (2% fixed-line and 1.07 mobile). The government has been planning full privatisation of the telecommunications sector, but has made little progress. The government resorted to shutting down all communications for a week in February 2005. It allowed mobiles to re-operate in some cities only in early May and, gradually, in other parts of the country. In March 2004 the government introduced a new telecoms policy, the main goal of which is to ensure universal access to telecoms services at reasonable prices. It calls for greater liberalisation and involvement of the private sector. In July 2005 the NTA had licensed 32 Internet service providers and 89 satellite communications users and service providers. NTA licensed two companies to operate satellite mobile phone services in April 2003, a move largely aimed at regularising the illegal use of the phones. Nepal has two licensees for providing basic telephone services, one to provide rural telephone services and two mobile-phone providers. A private mobile-phone provider, Spice Nepal, began services in September 2005; it is a joint venture of Nepalis (20%) and VISOR, an investment company registered in Kazakhstan. According to the NTA, Nepal had 45,000 Internet connections and an estimated 225,000 Internet users. There were 687 satellite phone subscribers in Nepal in mid-July 2005.

Broadcast media The government licenses and regulates the broadcast media and also runs national radio and television stations. About 80% of the population can receive Radio Nepal, but only 65% of the population are able to receive Nepal Television (NTV) broadcasts. The government licensed a television company, Space Time Network (STN), to broadcast via satellite in 1993, but denied it permission to uplink from Nepal in 2001. In September 2002 STN won a court order allowing it to uplink from the country. In early 2002 the government licensed three more private television companies, and added a local channel to NTV. The new private channels began broadcasting in July 2003, one of which began to broadcast via satellite in February 2006. The government refused permission to another station"seen to be anti-government"that also wanted to use satellite and broadcast nationally.

Nepal began licensing private FM radio in 1997, and had licensed 56 private stations of which 47 were operational in December 2004. Most of the FM stations are small operations; some are run by non-profit and community groups. The Maoists rebels also claim to operate five clandestine radios, whose broadcasts can be heard on certain days in many districts outside the Kathmandu valley. In March 2006 the Royal Nepalese Army said it had government approval for operating six FM stations. After the royal takeover in February 2005 the government barred FM stations from broadcasting news, effectively clearing the airwaves of rebel broadcasts. Independent FM radios began broadcasting news following a November 30th 2005 interim verdict of the Supreme Court that said it was their duty to uphold the right of the public to be informed (by providing news).

The press The Nepali press has traditionally been lively, but since November 2001 the government has shut down several newspapers sympathetic to the Maoists and has arrested several journalists. The government owns one English-language and one Nepali newspaper, but several daily and weekly publications in both languages enjoy a fairly wide circulation. There is a plethora of smaller newspapers and magazines, in Nepali and some local languages, with tiny circulations, many of which are affiliated to political parties. In mid-March 2005 the number of registered newspapers in Nepal had reached 4,049 but less than half of them publish regularly. The constitution bars the government from cancelling the registration of a newspaper for published content, which has prevented the post-February 2005 government from shutting down media not supportive of its actions. Instead, and perhaps as a strategy to strangle the critical media financially, since mid-2005 the government has begun distributing publicly paid advertisements only to media supportive of “nation, nationalism and the institution of monarchy”. After declaring a state of emergency in February 2005 the government introduced new controls, including severe censorship of the media. The government amended six media- related laws on October 9th 2005 to introduce new media controls. The government’s efforts to enforce the laws have been scuttled by the interim Supreme Court verdict.

Energy provision

Firewood supplies three- Most of Nepal is heavily dependent on traditional energy sources, including quarters of Nepal’s energy firewood as well as farm and livestock residues. Energy consumption in 2004/05 was 8.6m tonnes of oil equivalent. However, traditional sources accounted for 87% of consumption in 2003/04. Firewood supplies the vast bulk of energy needs, at around 77.5% of total energy consumption, used mainly for heating and cooking. Petroleum products provided 8.7%, coal 2% and electricity 1.6% of the total energy consumed. The development of the power sector has been hamstrung by the lack of both a coherent energy policy and investment capital. Total installed capacity in 2004/05 was 613 mw. Among the independent power producers (IPPs), a Norwegian joint venture (involving three Norwegian energy companies, Statkraft, Kvaerner Energy and ABB Kraft, and the local Butwal Power

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Company) has a generating capacity of 60 mw. A local firm, Himal International Energy (HIEPL), acquired the shares of its two US partners in March 2006 and has a generating capacity of 36 mw. Together 11 IPPs supplied 24.2% of the total installed capacity of the Nepal Electricity Authority (NEA) in 2004/05. The government is building another 70-mw project with German assistance from the Kreditanstalt fur Wiederaufau (KFW). The poor security situation disrupted construction of the Middle Marsyangdi project several times"the completion date was reset to December 2006 in early 2004. The NEA forecasts installed capacity to grow to 693.6 mw in 2006, and to double that figure by 2015. The NEA’s “system” loss in 2004 was 23% of output. The government has begun making bulk sales to community organisations that then sell power to their constituents to reduce theft"a major component of loss to the system. The government is also planning to unbundle the NEA to increase efficiency by separating generation, transmission and distribution and customer services. The NEA had around 1.16m consumer connections in 2004/05, as well as 22,500 industrial and 6,000 commercial users.

Hydropower potential Hydropower is the main source of electricity. Nepal has the potential to generate up to 83,000 mw of hydropower, but this remains largely untapped, for both technical and political reasons. Water flows in many rivers are highly variable, and there is controversy over Nepal’s use of rivers that flow into India. In 1996 Nepal and India agreed on the joint development of the Mahakali river, but the project has not progressed.

Investment capital is scarce The greatest obstacles to development of the power sector are economic. Hydropower is more capital-intensive than thermal power generation, and Nepal lacks the necessary capital. Nepal’s average electricity tariff is already one of the highest in South Asia, mainly because of high"often inflated" construction costs as well as other forms of inefficiency. Foreign investors have not been convinced of the financial viability of large projects. Some foreign investors have become caught up in Nepal’s internal politics, and as the only viable market for power is Nepal’s neighbour, India, they have also encountered delays in relation to investments that involve exporting power to India.

The economy

Economic structure

Main economic indicators, 2004/05a GDP growth (factor cost; %) 2.0 Consumer price inflation (%) 4.5 Current-account balance (US$ m) 405b Foreign debt (US$ m) 3,253c Exchange rate (NRs:US$; av) 71.4d a Fiscal year ending July 15th. b Economist Intelligence Unit estimate. c End-2003. d 2005. Sources: Nepal Rastra Bank, Macroeconomic indicators of Nepal; World Bank, Global Development Finance 2005.

Subsistence farming The contribution to GDP of agriculture, forestry and fishing has fallen from

predominates around 70% in fiscal year 1974/75 (July 16th-July 15th) to 38.3% in 2004/05, because of growth in public utilities, trade and hotels, transport and other services. Most agricultural production takes place in the Terai plains and the fertile valleys of the central hilly regions. Farming plots are highly fragmented, and an estimated 11% of cultivated plots are smaller than 0.5 ha.

Manufacturing is limited The manufacturing sector"limited largely to low-end consumer items, carpets, garments and handicrafts"accounted for 7.8% of GDP in 2004/05. Indian competition, poor infrastructure, a limited local market and the lack of sea access hinders development. The largest component of the services sector has traditionally been tourism, although a fall in tourism activity after 2000 caused the finance and real-estate sector to become the largest component (11.4% in 2004/05). Trade, restaurants and hotels made up 9.8% of GDP in 2004/05.

Investment and savings levels The principal structural problem is the extremely low rates of saving and are low investment. Gross fixed investment was estimated at 26.7% of GDP and the gross domestic savings rate was 12.6% in 2004/05. The total government revenue/GDP ratio stood at 12.6% in 2004/05, and the tax revenue/GDP ratio, which excludes non-tax revenue such as administrative fees, sales receipts and rents, was 9.7%.

Comparative economic indicators, 2005 Nepal India China Bangladesh Sri Lanka Real GDP growth (%) 2.0 8.5 9.9 5.4 5.6 GDP (US$ bn) 7.0 797.8 2,224.9 60.0 23.9 GDP per head (US$) 260 728 1,702 423 1,150 Consumer price inflation (av; %) 4.5 4.2 1.8 7.0 11.6 Current-account balance (US$ bn) 0.4a -19.8 116.1 -0.6 -0.4 Current-account balance (% of GDP) 5.7a -2.5 5.2 -1.0 -1.5 Exports of goods fob (US$ bn) 0.8a 92.2 762.2 9.5 6.5 Imports of goods fob (US$ bn) -1.8a -148.1 -660.1 -13.1 -8.4 External debt (US$ bn) 3.2b 124.9 263.7 20.6 11.1 Exchange rate (currency unit per US$) 71.4 44.1 8.19 64.3 100.5 a 2004. b End-2003. Sources: Economist Intelligence Unit; national sources.

Economic policy

Economic development is slow Low GDP and high population growth have constrained the growth of GDP per head, which was only US$260 in 2004/05. The dependence on foreign assistance remains high"over 60% of the government’s development budget is funded externally. In the 1990s foreign borrowing grew steadily, but the provision of foreign grants slowed. Weak institutional capability and corruption have hindered development programmes and projects.

Economic reforms of the 1990s A structural economic reform programme was instituted in 1992 with IMF support. The current account became partially convertible, licence and quota requirements on international trade were removed, industrial and foreign

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investment regulations were liberalised, the tax system was restructured, tariff barriers were lowered, some public enterprises were privatised and the financial sector was enlarged. Progress in most areas has been slow, however, and the formal non-agricultural economy remains dominated by inefficient state-run firms.

Privatisation runs into trouble Weak governments and procedural problems have been the main impediments to privatisation. The government began privatising public enterprises in 1992 and had privatised or liquidated 24 public enterprises by mid-July 2004. The government began hiring professionals to run public enterprises on performance contracts in 2003/04, and by mid-March 2005 it had hired such managers to run 21 organisations. The government plans to privatise more companies"a condition of the IMF’s Poverty Reduction and Growth Facility (PRGF) loan"but delays have occurred because of political instability.

Chronic budget deficits Government finances are in a mess, with budget deficits on a generally rising trend financed mainly by foreign grants and loans. Rising security spending remains a concern, especially after India, the UK and the US stopped military support in response to the royal takeover in February 2005. The only significant widening of the domestic tax base has been value-added tax (VAT), with the number of registered VAT payers reaching 39,848 in July 2005. Imports are the major source for tax.

Summary of government finances, 2005/06a (NRs m) Total revenue 100,503 Foreign grants 18,687 Other revenue 81,817 Total expenditure 126,885 Recurrent expenditure 75,850 Capital expenditure 37,234 Principal repayment 13,801 Balance -26,382 To be financed by foreign loans 14,532 a Fiscal years ending July 15th. Budget estimates. Source: Ministry of Finance, 2005/06.

Reliance on foreign aid Nepal’s continued dependence on foreign aid, and the scant impact that aid has produced over the past quarter of a century, has raised the prospect of donor fatigue. Major donors, including Japan, the Asian Development Bank, the UN Development Programme and the World Bank, have called for greater administrative efficiency, accountability and transparency in the use of aid. Nepal’s main donors"grouped in the Nepal Development Forum"met in the capital, Kathmandu, on May 5th-6th 2004 and told the government that funds to support poverty reduction would be made available only if Nepal guaranteed effective and corruption-free implementation. In 2004 Nepal estimated that it needs US$560m of foreign aid annually to implement its reform and development programme, including the Immediate Action Plan (IAP)"an annualised list of priority actions and projects"and the restructuring of two ailing commercial banks in the medium term. Nepal

launched its tenth five-year plan (its poverty reduction strategy) in December 2002. In mid-July 2002 it also began implementing the medium-term expenditure framework, a priority-based spending formula to make the allocation of funds more focused. The government has met several commitments made under the IAP, including issuing new ordinances for secured transactions and insolvency and amending the company and labour laws, among others. The performance on the IAPs provides donors a basis to assess government actions.

Economic performance

GDP growth is sluggish Nepal’s economic performance has been poor. GDP growth per year averaged less than 4% between 1997/98 and 2001/02 (the ninth five-year plan period), short of the government’s target of 6% per year. The average growth rate in the period 2000/01 to 2004/05 was 2.6%. GDP growth (factor cost) in 2003/04 was 3.3%, slightly better than the previous year. According to the Central Bureau of Statistics (CBS), real GDP grew by just 2% in 2004/05, with agriculture growing by 2.8% and non-agriculture by 1.6%.

Nepal’s poverty level declines Despite low GDP growth, Nepal’s poverty level has decreased significantly between 1995/96 and 2003/04, but a significant number of people (76% of the economically active population) still live in rural areas and depend on subsistence farming. The Nepal Living Standards Survey 2003/04 (NLSS II) estimated that around 31% of Nepalis were living below the poverty line, down from around 42% in 1995/96. (Nepal’s tenth five-year plan 2002/03-2006/07 has a target poverty level of 30%.) Poverty declined faster in urban areas (from 22% to 10%), whereas the reduction was slower in the rural areas (from 43% to 35%). A major factor improving household income was remittances from Nepalis working abroad. The percentage of households receiving remittances rose to 32% in 2003/04 from 23% in 1995/96. The IMF estimated that 1m Nepalis were working abroad in 2004 and remittances made up 12% of GDP. Other factors were an improvement in wages in both the agricultural and non- agricultural sectors.

Agriculture fares better than Until 1990 average growth rates in the agricultural and non-agricultural sectors non-agriculture were roughly comparable. In the ninth five-year plan (ending 2001/02) the annual average rate of agricultural growth was 3.3% (compared with a target of 4.2%) and non-agricultural growth was 3.9% (against a target of 8%). Non- agricultural growth (factor cost) from 2000/01 to 2004/05 averaged around 2.3% a year, partly reflecting the impact of the armed conflict and factors affecting external trade, such as the disruption of production for export to India. Agricultural growth during the same period averaged 3.4% a year.

Inflation is rising Inflation was low between 2000 and 2004, averaging 3.4% a year. However, consumer prices have been increasing steadily since 2004, reflecting a higher value-added tax (VAT) rate, which was raised from 10% to 13% in January 2004, and the pass-through of higher international oil prices during 2005. Consumer prices rose by 7% year on year in mid-December 2005.

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Underemployment is common Wage data are scanty, although it is generally believed that wages have risen roughly in line with inflation. Similarly, there is little reliable information on urban unemployment. At end-2002 the government estimated that about 5% of the labour force of 9.9m was unemployed. The government estimates that the seasonal nature of agricultural work and the lack of alternative employment options mean that 32% of the total labour force is “underemployed”. NLSS II data reported that 74.3% of the people were employed in 2003/04, compared with 67.2% in 1995/96 (NLSS I). There has been a decline in employment in agriculture, whereas that in the non-agriculture sector is rising. Every year about 300,000 people enter the employment market, although few new jobs are created.

Working abroad is becoming The 2001 census found that 762,181 people were absent from their homes, most

increasingly popular of them having headed for work abroad. Among them, 589,050 had gone to India and 123,285 were in Saudi Arabia, Qatar, Kuwait, the UAE and Bahrain. An increasing number of Nepalis are also heading to Malaysia, to work mainly as semi-skilled and unskilled labourers. According to official data, the number of Nepalis permitted to work abroad had reached 536,500 in 2004/05, but this number does not include those going abroad through informal channels.

Real wages have grown The average agricultural daily wage was around NRs75 (around US$1) in by 3% a year 2003/04, which provides a basis for determining the minimum for other sectors. The average wage for the non-agricultural sector was NRs133 in 2003/04. According to the NLSS II, average real agricultural wages rose by 25% between 1995/96 and 2003/04. Average real non-skilled, non-agriculture wages rose by 20% between the two NLSS surveys. Nepal prohibits the employment of children under the age of 14 and the employment of children under 16 in hazardous work. In 2003/04 the incidence of child labour among 5-14 year-olds was 31.4%. Since 1996 Nepal has had a labour court to deal with industrial disputes. In 2000 there were 2,054 registered trade unions in Nepal, of which 1,759 were active. Nepal has three large trade union federations, which are affiliated with major political parties.

Economic sectors

Agriculture

Constraints on agriculture Around two-thirds of Nepal’s economically active population work in agriculture, which contributed around 38.2% of GDP in fiscal year 2004/05 (July16th-July 15th). Agriculture suffers from several disadvantages: unpredictable weather, the poor performance of irrigation projects, a dwindling rate of capital formation, and a feudal land tenure system characterised by concentrated ownership and exorbitant rates of rent. The IMF estimates that the absolute number of landless households has increased, while holdings have further fragmented. According to the NLSS II, the average size of land holdings declined from 1.1 ha in 1995/96 to 0.8 ha in 2003/04. Meanwhile, parcels of less

than 0.5 ha made up 44.8% of the holdings in 2003/04, up from 40.1% in 1995/96. Non-subsistence agriculture is mainly practised in the Terai plains, but food surpluses there do not compensate for chronic food deficits in the mountain areas. The government supplements supplies in over 30 districts, where there are donor-aided projects distributing food. The burgeoning population has extended cultivation to marginal land and steep slopes, leading to deforestation, soil erosion and landslides.

Slow growth in grain The production of grain crops in 2004/05 was estimated at 7.8m tonnes, mainly production rice (55% of total output), maize (22%) and wheat (18.5%). Cash crops, principally sugarcane, potatoes, oilseeds, jute and tobacco, have grown faster than food crops with an estimated output of 4.2m tonnes in 2004/05. Sugarcane and potatoes have recorded the most substantial gains in production and yields. Despite favourable terrain and climate, Nepal has failed to realise its potential as a tea-growing nation. Tea production in 2004/05 was 13,500 tonnes. The planted area, output and yield of jute, formerly the main cash crop, has declined since 1988. Food grain production rose by 0.3% to 7.76m tonnes in 2004/05, partly a function of an increase in total cultivated area (0.3%). The index for yield of foodgrains also rose by 0.3% in 2004/05. The slow growth was largely a reflection of a decline in paddy output, the main crop.

Crop production (fiscal years ending Jul 15th; m tonnes) 1999/2000 2000/01 2001/02 2002/03 2003/04 Food grains 6.99 7.17 7.25 7.36 7.74 Cash crops 3.43 3.68 3.88 4.02 4.10 Others 2.17 2.38 2.46 2.58 2.66

Source: CBS, National Accounts of Nepal 2004.

Mining and semi-processing

Few mineral reserves Mining and quarrying accounted for 0.5% of GDP in 2004/05. The major known exploitable mineral reserves include lead, zinc, iron ore, limestone, marble, magnesite and oil. In general, however, known deposits are not considered commercially exploitable. Nepal has substantial cement-grade limestone deposits in Baitadi, Udayapur, Syangja, Dhankuta, Surkhet and Argakhanchi districts. According to the Department of Mines, Nepal produced 3,434 tonnes of talc, 50 tonnes of magnesite, 338,109 tonnes of limestones, 10,459 tonnes of coal, 121.5 tonnes of industrial grade quartz crystals and 10,350 kg of industrial grade kyanite in 2003/04. The domestic cement industry meets about 40% of total domestic demand. About 150,000 tonnes of high-grade deposits of lead and 700,000 tonnes of zinc exist in the Ganesh Himal region, but these are not thought to be commercially viable. Magnesite reserves at Kharidhunga are estimated at 212m tonnes, of which about 32m tonnes is of high grade. The Kathmandu valley has 14 natural gas wells, estimated to hold

310m cu metres of methane, but the wells have not been tapped for commercial use. Oil reserves are estimated to be between 300m and 700m barrels. The government has been prospecting for petroleum in ten blocks in the plains since 1985, but has had little success. A US-based oil company, Texana Resources, was awarded two blocks for exploration in 1998. On August 11th 2004 Nepal licensed a UK-based company, Carin Energy, to explore petroleum in five new blocks. The four-year contract (renewable for another four) allows Carin to explore for oil in about 24,500 sq km of territory where no drilling has taken place.

Manufacturing

Industrialisation has failed Manufacturing contributed 7.8% of GDP in 2004/05. The manufacturing sector is constrained by the small domestic market, Indian competition, the impracticality of import restrictions along the open southern border and the lack of sea access. A further hindrance to industrial development is the lack of infrastructure, skills and capital. Since the early 1990s successive governments have tried to encourage private investment in industry, but the industrial sector has yet to attract large amounts of domestic investment (domestic capital is mainly invested in traditional sources of wealth, such as land, gold and gems, as well as in the services sector). India is the most important foreign investor.

Production in low value added Manufacturing firms tend to be small, and are concentrated in the Kathmandu sectors valley and central and eastern Terai plains. Manufacturing activity is largely concentrated in three low value added sectors"food and beverages, tobacco and textiles. The only sector generating significant export earnings is textiles (mostly readymade garments and woollen carpets), but even in this sector earnings have begun to fall largely reflecting Nepal’s inability to compete globally after the global trade quotas on clothing and textiles came to an end on December 31st 2004. Maoist disturbances, including demands for “taxes”, are another reason for slow growth of manufacturing, not to mention restrictive labour laws. Since March 2006 Nepal has a new labour law, which eases the employment rules. In 2005 one major multinational, Colgate Palmolive, closed shop and moved its production unit to India. It had been producing in Nepal since the mid-1990s.

Construction

Building is constrained by a The construction industry is relatively underdeveloped, even though urban lack of materials centres have witnessed a surge in building construction in recent years. The growth has been fuelled by the conflict-induced migration from rural to relatively more secure urban areas. In 2004/05 the sector contributed 10.5% of GDP. Despite high demands on the construction industry, domestic production of basic materials has been inadequate. Laws governing the construction sector mainly focus on the public rather than the private sector.

Financial services

The state still plays a major The financial sector, although theoretically deregulated during the 1990s, is still role in banking subject to tight state control. The finance and real-estate sector made up 11.1% of GDP in 2004/05. Since 2002/03 the Nepal Rastra Bank (the central bank) has moved away from a policy of controlling commercial bank credit. The plan is to phase out priority sector lending by 2007/08, under which commercial banks are required to lend 4% of the value of their total outstanding loans to the priority projects set by government. The central bank nevertheless continues its policy of refinancing sick industries in manufacturing and tourism at low interest rates. The government owns the Rastriya Banijya Bank (RBB, a commercial bank) and controls about 40% of another commercial bank, Nepal Bank (NBL). These banks account for about 60% of all lending and roughly 50% of deposits in the banking system. In practice, therefore, credit remains a state monopoly. In July 2005 Nepal had 17 commercial banks, 26 development banks, five rural development banks and 60 finance companies, 20 saving and credit cooperatives, 47 financial non-governmental organisations (NGOs), eleven micro-credit development banks and 116 postal savings banks. The co-operative and NGO-run financial institutions provide basic banking services and micro- credit. The number of commercial bank branches in 2003/04 was 381, with the RBB having 132 and the NBL 116 branches. Nepal had 18 companies providing insurance (both life and non-life) in mid- March 2004, including three joint ventures. Among the companies, 13 provide non-life insurance, three life insurance and two both services. The total premiums of the companies amounted to NRs10.7bn (US$145m) in 2003/04, of which 86% were life insurance premiums. In July 2002 the government brought in the consulting division of the ICC Bank (Ireland), a member of the Bank of Scotland group, as external management consultants to run the ailing and technically insolvent NBL. In December 2002 the government hired a US expatriate to restructure and reform the RBB. He started on January 16th 2003. According to the World Bank, in 1998 the two banks had a negative net worth of US$450m, equivalent to about 46% of the government budget or 8.6% of GDP. In March 2004 the World Bank approved a US$68.5m credit (and a US$7m grant) to help the government to continue with the banking reforms. The government set up the debt recovery tribunal in June 2003. According to the central bank, non-performing loans of the commercial banks were NRs27.8bn in mid-July 2005 or around 19% of all loans. In May 2005 the government approved a report recommending strong actions against loan defaulters"blacklisting “wilful” defaulters, confiscating their passports, not appointing them to public office and preventing them from disposing of their assets other than for repaying outstanding bank loans. However, no action has been taken, possibly because, as it was revealed by the press in 2005, that many in the king’s cabinet are defaulters.

Little interest in foreign joint- Since 1984 foreign banks have been allowed to establish joint-ventures, but venture banks majority ownership of the ventures by the foreign bank was not permitted until 2001. In 2001 the government decided to allow foreign banks to own up to two-thirds of joint ventures. The decision was aimed at convincing Nepal Indosuez Bank, a subsidiary of a French bank, Indosuez Bank, which set up a joint venture in 1986, not to pull out. Nevertheless, in March 2002 Indosuez pulled out, and another joint venture"the Nepal Bank of Ceylon"was divested in September 2002.

A moribund stock exchange The performance of the Nepal Stock Exchange (NEPSE) since 1993 has been poor, because of weak management, the lack of a corporate culture, the poor financial performance of listed companies (particularly manufacturing companies) and the lack of understanding by companies and the public of the share market. NEPSE opened its trading floor in January 1994. In mid-July 2005 Nepal had 128 companies listed on the NEPSE, and market capitalisation was NRs61.4bn. NEPSE rated 58 as category A-companies in 2005/06 (that is, companies with at least NRs20m or US$275,000 in paid-up capital, with at least 1,000 shareholders and those with profits for three consecutive years). All but one of the category-A companies were banks and finance companies.

Other services

Tou ri sm The tourism sector suffered a series of blows in the early 2000s, culminating in the killing of many members of the Nepali royal family and the disintegration of law and order. Total arrivals in 2001/02 fell to 275,500, down by 44% compared with 1998/99. Tourist arrivals began to recover in 2002/03, rising by over 20% to 338,100, and then by 14% to 385,300 in 2003/04. Nepal earned Rs18.1bn (US$245m) from tourism in 2003/04, equivalent to 33% of the value of merchandise exports and 11% of the total foreign-exchange earnings. However, the state of emergency imposed between February and April 2005 hit tourist arrivals, and the number of visitors arriving by air fell to 277,129 in 2005, around 3.9% lower than in 2004. The main source of tourists arriving by air in 2005 was India (86,328), followed by the UK (22,030), the US (15,809) and Japan (14,478).

Poor infrastructure Tourism’s declining relative importance as a foreign-exchange earner partly reflects the growth in other sources of foreign exchange (mainly remittances and foreign aid), but also reflects"aside from the dire domestic political situation"structural constraints on the sector. Although there is hotel overcapacity in the capital, Kathmandu, and the other main tourist centre, Pokhara, overall the infrastructure is inadequate. Internal air capacity and domestic transport services are limited, waste and water services in urban areas are poor and trekking routes are increasingly dilapidated. The Maoist conflict has also deterred tourists. The Maoists have not targeted tourists with violence, but they are often forced to pay “donations” and “tourism fees” when visiting remote destinations or have had travel plans disrupted by the frequent general strikes called by the rebels. The government recognises the importance of developing tourism to meet employment and foreign-exchange earning goals, and plans to extend trekking to remote areas and to improve the management

of pollution in the Kathmandu valley. Lack of investment capital is an obstacle. A major challenge is to achieve rapid tourism growth in mountain areas while minimising the environmental damage that high-intensity trekking can cause.

The external sector

Trade in goods

The trade deficit is massive As Nepal is landlocked, merchandise trade is a difficult sector to develop. India’s protectionism and control over the main transit routes are perennial problems. Nepal’s low level of development, and consequent reliance on imported capital goods, as well as its dependence on imported oil for energy, means that it runs a chronic trade deficit. Merchandise exports of NRs58.2bn (US$800m) in 2004/05 were swamped by merchandise imports of NRs132.1bn, creating a trade deficit of NRs74bn (14% of GDP). Moreover, problems with the accuracy of trade data mean that the value of capital goods imports is likely to be larger than is indicated by official statistics.

India is the leading trade Over the past three decades Nepal has opened up substantially to trade with partner the rest of the world, although the range of both imports and exports remains narrow. India dominates Nepal’s external trade, accounting for 66% of Nepal’s total trade in 2004/05. India is an increasingly important source of machinery and vehicles as well as consumer products.

Main trading partners, 2004/05a (NRs m) Exports to: Imports from: India 39,448 Indiab 85,836 US 7,571 Chinac 8,254 Germany 3,121 Singapore 7,746 UK 1,050 Indonesia 5,222 France 617 Saudi Arabia 3,138 Italy 582 Thailand 2,820 Japan 535 Malaysia 2,784 a Fiscal years ending July 15th; provisional figures. b Including petroleum product imports. c Excluding imports from Tibet. Source: Trade Promotion Centre.

Carpets and garments are the Although carpets and readymade garments have historically dominated main exports exports, this dominance is on the wane. The combined share of these two commodities amounted to 21% of total exports in 2004/05. Exports of readymade garments fell by almost 40% to NRs6.4bn in 2004/05, following the ending of global export quotas in December 2004. The end of quotas has forced Nepali producers to compete with regional garment giants like Bangladesh, India and China. Nepali producers also face higher transport costs because they have to import raw materials and re-export the finished product. Carpet exports amounted to NRs5.8bn in 2004/05. Hydrogenated vegetable oil has been Nepal’s main export to India since the mid-1990s. The export of vegetable oil in 2004/05 was valued at NRs4.6bn. Nepal’s dependence on a limited number of

products and a few markets makes its export performance extremely vulnerable to shifts in demand and tastes. In March 2002 India agreed to extend the trade treaty between the two countries only after Nepal agreed to an export ceiling of 100,000 tonnes on Nepal’s duty-free exports of vegetable oil. India also imposed quotas on Nepali exports of zinc oxide, acrylic yarn and copper wires. Trade with India has also been disrupted by sales restrictions, or local taxes imposed by Indian states, and by logistical problems arising from quality-control tests and quarantine certification.

Oil imports grow Oil is Nepal’s largest import from India. The import of oil has almost doubled from around NRs13.9bn in 2001/02 to NRs26.9bn in 2004/05. According to preliminary NRB data, oil imports rose by 35% in 2002/03, 7% in 2003/04 and 32% in 2004/05. In February 2006 the government began deregulating retail oil prices as a move towards opening up the sector to private competition.

Invisibles and the current account

Income from services drops Tourism earnings fell sharply to NRs8.6bn in 2001/02 following the royal sharply massacre, recovering by 36% to NRs11.7bn in 2002/03. The recovery continued in 2003/04, with earnings reaching NRs18.1bn. However, earnings slumped again in 2004/05 to NRs10.4bn, almost balanced by travel outflows of NRs9bn, as the security situation in the country deteriorated. Net services receipts dropped to a meagre NRs500m in 2004/05.

The current account moves Despite its substantial net inflow of transfers, Nepal has traditionally run a into surplus current-account deficit owing to its trade deficit. However, since 2002 the current account has registered small surpluses (US$51.7m in 2004, the latest year for which IMF current-account data are available), reflecting strong remittances by Nepalis working abroad and continued inflows of foreign aid. According to the central bank’s balance-of-payments data, workers’ remittances grew from NRs47.2bn in 2000/01 to NRs65.4bn in 2004/05. In March 2005 the government estimated that 536,500 Nepalis were working abroad. The same data source shows that the current-account surplus widened to NRs29.2bn (US$403m) in 2004/05.

Capital flows and foreign debt

Foreign aid supports the Nepal has generally recorded a positive overall balance of payments, balance of payments attributable almost entirely to foreign aid in the form of grants and low interest loans from donor governments and multilateral agencies. Foreign direct investment (FDI) is minimal, amounting to only NRs136m (US$2m) in 2004/05. Foreign aid has had a pervasive influence on Nepal’s development. The share of foreign aid in public-sector development expenditure is 60%. Generally aid makes up one-quarter of the government’s annual budget. Donors have publicly lamented the ineffectiveness of aid in alleviating Nepal’s structural economic problems and have commented on the need to improve governance,

but so far this has not led to a major decline in aid. Foreign aid amounted to NRs21bn (US$290m) in 2004/05.

Bilateral and multilateral aid Nepal!s main bilateral donors are Japan, the US, Denmark, the UK and Germany. India and China have also been substantial donors. The main multilateral lenders are the Asian Development Bank and the World Bank. Donor countries and agencies co-ordinate their aid policies at meetings of the Nepal Development Forum (NDF). The NDF includes donors that together provide almost 90% of foreign aid. The NDF last met in Nepal in May 2004, when donors stressed the need for co-ordination and harmonisation of aid, and linking disbursements to effective aid utilisation. Continued foreign aid to Nepal depends on its implementation of the poverty reduction strategy (PRSP). The World Bank extended US$70m as budget support to Nepal in November 2003 to help it implement economic reforms. The IMF also approved a US$70m credit to be drawn in seven tranches from its Poverty Reduction Growth Fund at around the same time. The bank, however, discontinued budget support in 2004 because of the government’s inability to meet “prior commitments”, including taking actions against “wilful” defaulters and enacting a labour law that allowed more flexibility in hiring and firing employees.

High external debt The increasing use of foreign loans to finance the government’s budget deficit raised the external debt burden dramatically between the mid-1970s and the mid-1990s. According to the World Bank, the ratio of external debt to gross national income rose from 10.4% in 1980 to 58.9% at the end of 1999, although the ratio fell to 53.3% at the end of 2002. The allocation for principal repayment was around NRs13.8bn or 10.8% of the budget for 2005/06. Nepal has plans for more infrastructure investment, which could increase its external debt further.

Foreign reserves and the exchange rate

Sound foreign-exchange Foreign aid and workers! remittances enabled Nepal to increase its foreign reserves reserves (excluding gold) to US$1.5bn at end-2005. According to the IMF, remittances rose from around US$100m in 1995/96 to US$920m in 2004/05, around 12% of GDP.

A de facto peg to the The US dollar and the Indian rupee are the two main currencies used in Indian rupee Nepal’s trade transactions. Since 1983 the Nepali rupee has been tied, in principle, to a trade-weighted basket of currencies. In practice, however, the exchange rate is pegged to the Indian rupee"a reflection of the high degree of integration between the Indian and Nepali economies. Since 1993 the exchange rate against the Indian rupee has remained constant at NRs1.60:Rs1. This has meant that the Nepali rupee declined against the US dollar from an annual average of NRs48.6:US$1 in 1993 to NRs77.9:US$1 in 2002. Since then, the Nepali rupee has tracked the Indian rupee’s appreciation against the US dollar. The Nepali rupee averaged NRs71.4: US$1 in 2005.

Regional overview

Membership of organisations

The South Asian Association for Regional Co-operation (SAARC), comprising India, Pakistan, Sri Lanka, Bangladesh, Nepal, the Maldives and Bhutan, was established in 1985 at a meeting in Bangladesh. Afghanistan became its eighth member at its 13th summit in November 2005, at the same time as observer status was given to China and Japan (the US and South Korea were also given observer status in March 2006). SAARC aims include promoting welfare, accelerating economic growth, eradicating poverty and improving relations between member states. Summit meetings are intended to be held annually and are complemented by technical committees, meetings of foreign ministers and a standing committee, which comprises the foreign secretaries (civil servants) of each country. An under-resourced secretariat, established in 1987, based in the Nepali capital, Kathmandu, co-ordinates SAARC’s activities. In SAARC’s early years agreements were made to establish a food security reserve, to establish a meteorological centre, to combat terrorism and to create various cultural exchanges between member states. SAARC has also established a South Asian Free-Trade Area (SAFTA) to replace the South Asian Preferential Trading Arrangement. SAFTA was approved at the 12th summit in Islamabad in 2004 and came into force retrospectively on January 1st 2006 following formal ratification from all members in March 2006. The first tariff cuts under SAFTA will take place in July 2006 and full implementation of the agreement is scheduled for 2015. In the first phase of trade liberalisation, India, Pakistan and Sri Lanka will bring down their tariff rates to 20% by January 1st 2008. The least developed countries (LDCs) in the organisation (Bangladesh, Bhutan, the Maldives and Nepal) will reduce their tariff rates to 30%. The first tariff reduction has to be put into effect by all member states by July 1st 2006 (August 2006 in the case of Nepal). Furthermore, India and Pakistan are to bring down their tariff rates to 5% or below by January 1st 2011 (January 2012 for Sri Lanka). The LDC members would have to do the same by 1st January 2016. After the 1997 SAARC summit, an eminent-persons group was constituted to plot the way forward for the association. The group argued that closer economic ties were the key to the future, and proposed that a free-trade area should be in place by 2008 (2010 for the least-developed member states), a customs union by 2015 and an economic union by 2020. Progress on such goals has traditionally been hampered by the tense relationship between India and Pakistan. However, the January 2004 and November 2005 SAARC meetings saw some improvement in the relationship between India and Pakistan. Progress within SAARC largely depends on there being a continued improvement in the Indian- Pakistani relationship. A significant development has been Nepal’s membership of the regional grouping, the Bay of Bengal Initiative for Multi-Sectoral Technical Economic Cooperation (BIMST-EC), in February 2004. This is an economic co-operation strategy among Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and

Nepal, all countries situated around the Bay of Bengal. Nepal sees this as a grouping with more potential than SAARC. At its inaugural meeting in 1998 BIMST-EC members agreed to co-operate in six areas, with each member taking the lead in planning and implementing programmes in each of the areas. The sectors and lead countries at the inception were: trade and investment (Bangladesh); technology (India); transport and communication (Thailand); energy (Myanmar); tourism and fisheries (Sri Lanka). There have been a number of meetings at the official level on making the region a free-trade area but, in the latest development, negotiators from the member countries who met in India in March 2006 failed to reach a consensus on the criteria of rules of origin under the pact. Thailand was reportedly in favour of a 30% value addition for developing member countries, whereas India lobbied for 40%.

Appendices

Sources of information

National statistical sources Economic data on Nepal have improved in recent years, but still lack full credibility. Data provided by Nepal Rastra Bank (the central bank) are considered the most accurate. The Ministry of Finance’s annual Economic Survey provides the broadest range of official data. The Central Bureau of Statistics publishes a Statistical Year Book of Nepal, which gives information not included in the Economic Survey. In alternate years it publishes the Statistical Pocket Book. Other national statistical sources include the following. Central Bureau of Statistics, National Accounts of Nepal Central Bureau of Statistics, Population Census 2001 Central Bureau of Statistics, Nepal Living Standards Survey 2003/04 Central Bureau of Statistics, Statistical Year Book of Nepal Civil Aviation Authority of Nepal, Civil Aviation Report 2005 Department of Education, School Level Educational Statistics of Nepal, Flash Report I, 2004 Gorkhapatra (official daily), Kathmandu Himal Khabarpatrika (fortnightly), Kathmandu Nepal (weekly), Kathmandu Samaya (weekly), Kathmandu Ministry of Finance, Budget Speech (annual) Ministry of Tourism and Culture, Summary of Tourism Statistics (annual) National Planning Commission, Five Year Plan, various years Nepal Rastra Bank, Economic Report (annual) Nepal Rastra Bank, Main Economic Indicators (monthly) The Kathmandu Post (daily newspaper)

International statistical sources Asian Development Bank, Country Report on Nepal (annual), Manila Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries (annual), Manila IMF, Nepal: 2006 Article IV Consultation, Washington DC, February 2006 UN Development Programme, Human Development Report (annual), New York World Bank, Nepal: Country Assistance Strategy, 2004-07, Kathmandu, 2003

World Bank, State-in-Conflict: Resilient People: An Assessment of the Changes in Poverty in Nepal Between 1995-96 and 2003-04, Kathmandu, December 2005

Select bibliography and Asian Development Bank, Nepal page, with links to Key Indicators and websites economic reports: www.adb.org/Nepal Election Commission: www.election-commission.org.np Info-Nepal, a general directory on Nepal: www.info-nepal.com National Planning Commission (Nepali and English): npc.gov.np Nepal Rastra Bank (the central bank): www.nrb.org.np Nepali Times, an English-language daily: www.nepalitimes.com Trade Promotion Centre, with some trade statistics: www.tpcnepal.org.np Nepal Stock Exchange, with data on stocks: www.nepalstock.com. Beema Samiti (Insurance Board), with data on insurance: www.bsib.org.np World Bank, Nepal page: www.worldbank.org.np

Reference tables

These reference tables provide the most up-to-date statistics available at the time of publication.

Population 2000 2001 2002 2003 2004 Mid-year estimates (m) 24.4 24.9 25.5 26.0 26.6 % change, year on year 2.2 2.0 2.4 1.9 2.3

Source: IMF, International Financial Statistics.

Energy consumptiona (‘000 tonnes oil equivalent) 2000/01 2001/02 2002/03 2003/04 2004/05b Traditional 6,824 7,066 7,240 7,397 7,557 Firewood 6,068 6,315 6,451 6,591 6,733 Animal dung 457 446 477 487 496 Agri-waste 299 305 312 319 328 Commercial 1,016 1,029 1,015 1,059 1,054 Petroleum 734 758 753 747 754 Coal 174 152 134 171 153 Electricity 108 119 128 141 147 a Fiscal years July 16th-July 15th. b Provisional. Source: Ministry of Finance, Economic Survey.

Government financesa (NRs m) 2000/01 2001/02 2002/03 2003/04 2004/05 Total revenue 55,647 57,132 67,569 73,614 82,492 Foreign grants 6,753 6,686 11,339 11,283 11,170 Other receipts 48,894 50,446 56,230 62,331 71,322 Total expenditure 79,835 80,072 84,006 89,443 100,937 Recurrent expenditure 45,837 48,864 52,090 55,552 63,117 Capital expenditure 28,307 24,773 22,356 23,096 25,165 Principal repayment 5,691 6,435 9,560 10,795 12,654 Fiscal balance -24,188 -22,941 -16,437 -15,828 -18,445 Financed by: Foreign loans 12,044 7,699 4,546 7,629 8,814 Domestic borrowings 7,000 8,000 8,880 5,608 9,060 Cash balance (- indicates surplus) 5,144 7,242 3,011 2,591 571 a Fiscal years July 16th-July 15th. Source: Ministry of Finance, Economic Survey.

Gross domestic product at factor costa 2000/01 2001/02 2002/03 2003/04 2004/05 NRs m At current prices 394,052 406,138 437,546 474,129 504,101 At constant (1994/95) prices 280,000 279,169 287,857 297,231 303,298 % change, year on year 4.7 -0.3 3.1 3.3 2.0 Per head (NRs) At current prices 16,130 16,310 17,160 18,240 18,950 At constant (1994/95) prices 11,470 11,210 11,290 11,430 11,400 % change, year on year 2.8 -2.3 0.7 1.2 -0.3 a Fiscal years July 16th-July 15th. Source: Nepal Rastra Bank, Macroecoeconomic Indicators of Nepal.

Gross domestic product by expenditurea (NRs m unless otherwise indicated) 1999/2000 2000/01 2001/02 2002/03 2003/04 Private consumption 287,947 309,107 329,199 355,535 383,978 Government consumption 33,964 40,150 42,327 46,653 50,412 Gross fixed capital formation 73,324 78,013 81,613 86,963 92,619 Change in stocks 18,948 20,784 20,056 30,542 39,488 Exports of goods & services 88,360 91,821 77,068 75,764 85,409 Imports of goods & services -123,055 -129,104 -127,961 -140,522 -157,023 GDP 379,488 410,789 422,301 454,934 494,882 a Fiscal years July 16th-July 15th. Source: IMF, International Financial Statistics.

Gross domestic product by sectora (NRs m at current prices; % of total in brackets) 2000/01 2001/02 2002/03 2003/04 2004/05c Agriculture 151,059 160,144 171,104 183,357 193,291 Mining & quarrying 1,924 2,056 2,188 2,377 2,615 Manufacturing 35,495 32,805 34,337 36,634 39,494 Electricity, gas & water 7,432 8,635 10,905 11340 12,258 Construction 39,584 42,290 45,068 49,033 52,729 Trade, restaurants & hotels 44,572 40,772 43,978 49,320 49,478 Transport, communications & storage 33,297 34,652 38,286 43,664 47,558 Finance & real estate 41,634 43,882 47,719 51,411 56,088 Community & social services 39,055 40,902 43,961 46,993 50,590 GDP at factor costb 394,052 406,138 437,546 474,129 504,101 a Fiscal years July 16th-July 15th. b Before deducting imputed value of bank charges. c Provisional. Source: Ministry of Finance, Economic Survey.

Consumer prices, national dataa (1995/96=100 unless otherwise indicated; period averages) 2000/01 2001/02 2002/03 2003/04 2004/05 Food & beverages 133.0 137.9 144.0 148.8 154.7 % change -2.3 3.7 4.4 3.3 4.0 Non-food items & services 144.2 147.2 154.6 161.8 169.2 % change 8.1 2.1 5.0 4.7 5.1 All items 138.1 142.1 148.9 154.8 161.8 % change 2.4 2.9 4.8 4.0 4.5 a Fiscal years July 16th-July 15th. Source: Nepal Rastra Bank, Economic Report.

Money supply and interest rates (NRs m unless otherwise indicated) 2000 2001 2002 2003 2004 Money (M1) 63,028 n/a n/a n/a n/a Quasi-money 132,550 145,946 152,019 171,641 193,304 Money supply (M2) 195,578 n/a n/a n/a n/a Discount rate (end-period; %) 7.5 6.5 5.5 5.5 5.50 Treasury-bill rate (%) 5.30 5.00 3.80 3.85 2.40 Lending rate (%) 9.46 7.67 n/a n/a 8.50 Government bond yield (%) 8.50 8.50 8.25 7.50 6.63

Source: IMF, International Financial Statistics.

Production index of manufacturing industriesa (1986/87=100 unless otherwise indicated; % change year on year in brackets) Weight (%) 2000/01 2001/02 2002/03 2003/04 2004/05b Food manufacturing 19.3 957.1 996.1 843.7 822.9 849.3 (6.7) (4.1) (-15.3) (-2.5) (3.2) Beverage industries 3.9 316.1 304.9 328.4 357.4 358.1 (3.6) (-3.7) (7.7) (8.8) (0.2) Tobacco manufacturing 20.1 118.3 116.3 114.7 122.3 124.8 (5.8) (-1.7) (8.6) (6.6) (2.0) Textiles 18.1 164.6 163.9 180.9 193.8 189.6 (2.4) (-0.4) (15.2) (7.1) (-2.2) Leather & leather products 2.3 26.0 25.6 25.1 24.8 25.6 (15.7) (-8.6) (9.0) (-1.2) (3.2) Footwear 0.4 586.0 614.9 649.6 714.9 688.4 (9.0) (4.9) (1.6) (10.1) (-3.7) Wood & wood products 2.0 45.0 45.9 38.2 42.5 46.1 (8.3) (2.0) (-35.0) (11.3) (8.4) Paper & paper products 0.9 1,515.5 1,505.7 1,580.9 1,573.1 1,664.8 (3.0) (-0.6) (4.9) (-0.5) (5.8) Chemicals 6.1 337.8 342.0 332.5 336.3 330.4 (6.6) (1.2) (11.0) (1.1) (-1.8) Rubber products 0.7 111.4 115.8 100.4 106.9 99.6 (-2.0) (3.9) (-11.4) (6.5) (-6.8) Plastic products 1.3 119.5 121.9 119.9 113.3 122.1 (2.0) (2.0) (17.7) (-5.5) (7.8) Non-metallic mineral products 16.9 108.1 113.5 125.8 135.1 135.1 (3.7) (5.0) (28.9) (7.4) (0.0) Iron & steel 3.1 393.5 405.2 447.6 490.0 483.2 (3.5) (3.0) (17.1) (9.5) (-1.4) Cutlery & hand tools 3.2 12.4 12.8 14.6 19.4 22.0 (1.6) (3.2) (13.2) (32.9) (13.4) Electrical & industrial machinery 1.9 294.5 304.3 336.6 327.4 329.0 (9.8) (3.3) (4.4) (-2.7) (0.5) Overall index 100.0 326.0 334.6 312.7 317.0 322.3 (6.3) (2.6) (-6.5) (1.4) (1.7) a Fiscal years July 16th-July 15th. b Provisional. Source: Ministry of Finance, Economic Survey.

Tourisma 2000/01 2001/02 2002/03 2003/04 2004/05 Arrivals by land (‘000) 86.7 66.8 56.8 69.0 87.9 Arrivals by air (‘000) 376.9 299.5 218.7 275.4 297.3 Tourist arrivals (‘000) 463.6 361.2 275.5 338.1 385.3 % change -5.7 -22.0 -23.7 22.7 13.9 Average length of stay (days) 11.8 11.9 7.9 9.6 13.5 Tourist expenditure (NRs m)a 12,074 11,717 8,654 11,747 18,147 a Fiscal years July 16th-July 15th. Source: Ministry of Finance, Economic Survey.

Foreign tradea (NRs m; current prices) 1999/2000 2000/01 2001/02 2002/03 2003/04 Exports 49,822.7 55,654.1 46,944.8 49,930.6 53,910.7 Food & live animals 4,240.4 4,776.6 5,094.2 6,100.9 6,276.9 Tobacco & beverages 117.2 75.6 145.7 138.7 55.2 Raw materials & inedible oils 561.3 751.1 624.5 800.1 714.3 Mineral fuels & lubricants 2.2 1.3 1.6 5.5 14.5 Animal & vegetable oils & fats 3,229.7 4,101.7 7,421.4 4,278.7 3,375.7 Chemicals & drugs 3,933.2 4,041.7 3,308.3 3,279.0 3,865.9 Manufactured goods classified by materials 15,838.7 18,909.3 17,394.9 17,794.7 23,601.7 Machinery & transport equipment 390.8 343.6 364.4 208.2 619.5 Miscellaneous manufactured articles 21,509.2 22,650.9 12,589.3 17,281.5 15,380.1 Not classified - - - 43.3 6.9 Imports 108,494.9 115,687.2 107,389.0 124,352.1 136,277.1 Food & live animals 10,839.0 5,994.4 6,333.2 9,370.5 8,554.0 Tobacco & beverages 906.5 906.1 717.1 792.2 1,026.8 Raw materials & inedible oils 7,012.4 7,559.6 6,732.7 8,479.3 10,550.6 Mineral fuels & lubricants 9,097.9 11,269.2 15,200.8 19,944.1 21,904.1 Animal & vegetable oils & fats 4,446.0 5,589.2 7,887.5 7,750.5 8,634.4 Chemicals & drugs 14,474.2 12,941.9 12,380.9 14,319.5 16,544.9 Manufactured goods classified by materials 34,420.0 41,188.0 32,889.1 34,888.2 36,510.5 Machinery & transport equipment 20,547.9 23,027.8 19,513.8 20,702.1 25,694.2 Miscellaneous manufactured articles 6,682.8 7,210.2 5,670.3 6,582.7 5,103.8 Not classified 68.2 0.8 62.1 1,523.0 1,753.8 a Fiscal years July 16th-July 15th. Source: Ministry of Finance, Economic Survey.

Balance of payments, IMF series

(US$ m) 2000 2001 2002 2003 2004 Goods: exports fob 776.1 720.5 632.0 703.2 763.6 Goods: imports fob -1,590.1 -1,485.7 -1,425.4 -1,665.9 -1,812.5 Trade balance -814.0 -765.2 -793.4 -962.7 -1,048.9 Services: credit 505.9 413.3 305.2 372.1 460.9 Services: debit -199.9 -214.7 -236.8 -266.2 -373.1 Income: credit 72.2 70.3 56.9 48.7 63.0 Income: debit -35.2 -58.8 -71.2 -69.0 -78.0 Current transfers: credit 189.0 240.2 828.1 1,022.5 1,090.6 Current transfers: debit -16.7 -24.3 -33.2 -25.4 -62.8 Current-account balance -298.7 -339.3 55.6 119.9 51.7 Direct investment abroad n/a n/a n/a n/a n/a Direct investment in Nepal n/a n/a -6.0 14.8 -0.4 Portfolio investment assets n/a n/a n/a n/a n/a Portfolio investment liabilities n/a n/a n/a n/a n/a Other investment assets 128.6 11.2 -470.4 -436.7 -350.8 Other investment liabilities -52.6 -228.0 71.5 67.8 -157.7 Financial balance 76.1 -216.9 -404.8 -354.1 -508.9 Capital-account balance n/a n/a 102.4 24.8 15.7 Net errors & omissions 145.7 256.5 -66.6 309.9 339.9 Overall balance -77.0 -299.6 -313.4 100.6 -101.7 Memorandum item Total change in reserve assets (- indicates inflow) -291.0 -5.2 65.5 -218.1 -178.2

Source: IMF, International Financial Statistics

External debt, World Bank series (US$ m unless otherwise indicated) 1999 2000 2001 2002 2003a Total external debt 2,993 2,846 2,716 2,972 3,253 Long-term debtb 2,933 2,805 2,654 2,929 3,176 Short-term debt 43 29 54 40 66 Use of IMF credit 18 12 8 4 11 Public & publicly guaranteed long-term debt 2,933 2,805 2,654 2,929 3,176 Official creditors 2,920 2,800 2,650 2,923 3,170 Multilateral 2,541 2,457 2,354 2,619 2,738 Bilateral 379 343 295 304 432 Private creditors 13 5 5 5 6 Commercial banks 0 0 0 0 0 Other private 13 5 5 5 6 Total debt service 107 102 93 102 113 Principal 69 67 61 70 79 Interest 30 28 26 27 30 Short-term debt 2 3 2 1 1 Ratios (%) Total external debt/GNI 59.3 51.6 48.5 53.5 55.7 Debt-service ratioc 7.6 7.0 6.9 6.2 6.0 Short-term debt/total external debt 1.4 1.0 2.0 1.3 2.0 Concessional long-term loans/long-term debt 97.5 98.4 97.6 98.3 97.4 a Figures may not add up due to rounding. b Original maturity of more than one year. c Debt service as a percentage of exports of goods and services. Source: World Bank, Global Development Finance.

Foreign reserves (US$ m unless otherwise indicated) 2001 2002 2003 2004 2005 SDRs 0.1 - 0.8 9.7 8.8 Reserve position at the IMF 7.2 7.8 8.6 - - Foreign exchange 1,030.4 1,009.8 1,213.1 1,452.5 1,490.2 Total reserves excl gold 1,037.7 1,017.6 1,222.5 1,462.2 1,499.0 Gold (m troy oz) 0.2 0.2 0.2 0.2 0.1 Gold (national valuation) 6.5 6.5 6.5 6.5 5.4 Total reserves incl gold 1,044.2 1,024.1 1,229.0 1,468.7 1,504.4

Source: IMF, International Financial Statistics.

Exchange rates 2001 2002 2003 2004 2005 NRs:US$ (end-period) 76.48 78.30 74.04 71.80 74.04 NRs:US$ (av) 74.95 77.88 76.14 73.67 71.37 NRs:Rs 1.60 1.60 1.60 1.60 1.60 NRs:SDR 96.11 106.45 110.02 111.51 105.83

Source: IMF, International Financial Statistics.

Editors: Gerard Walsh (editor); Caroline Bain (consulting editor) Editorial closing date: April 19th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]