Order Code RL31599
CRS Report for Congress
Received through the CRS Web
Nepal: Background
and U.S. Relations
Updated June 8, 2005
Bruce Vaughn
Analyst in Southeast and South Asian Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Nepal: Background and U.S. Relations
Summary
A landlocked Himalayan kingdom between India and China, Nepal ranks among
the world’s poorest countries. In 1990, following a democratization movement,
Nepal became a parliamentary democracy under a constitutional monarch. Although
this led to a process of economic restructuring and market liberalization, political
instability and years of increasingly dire internal security challenges have undercut
the country’s economic growth and reform efforts. Compounding the country’s
difficulties was the June 2001 tragedy in which ten members of the royal family,
including King Birendra, were killed in an assassination-suicide, reportedly carried
out by Crown Prince Dipendra. The murdered king’s younger brother, Gyanendra,
now occupies the throne. In a reversal of the longer-term trend towards a democratic
constitutional monarchy, King Gyanendra declared a state of emergency, assumed
full powers, suspended civil liberties, and placed opposition leaders under arrest on
February 1, 2005. The King explained his move as necessary to fight the Maoist
insurgency. Human rights advocates continue to be concerned about the human
rights situation in Nepal. U.S. foreign policy towards Nepal has provided
development and security assistance while seeking to promote democracy and human
rights.
Prior to the king’s takeover, the Kathmandu government faced serious political
opposition and increasing pressure to end a Maoist insurgency that since 1996 has
caused widespread violence and crippled the Nepali economy. More than 11,500
people reportedly have been killed in the fighting. Nepal’s Maoist rebels continuing
violent campaign to overthrow the Kathmandu government has heightened concerns
about the government’s ability to effectively counter the insurgency. Hopes for an
end to the civil war had been bolstered by a January 2003 cease-fire agreement.
Subsequent negotiations failed to produce a lasting peace as hostilities resumed in
August 2003. There exists fear that further deterioration of Nepal’s security
circumstances could lead to further human rights abuses, destabilize the region, spur
new tensions between India and China, and potentially create a failed state in South
Asia which could become a terrorist haven. The Maoists have been identified as an
“other terrorist group” by the State Department.
The king’s takeover can be seen as the culmination of events beginning at the
end of 2002 when the Nepali government faced a constitutional crises. In October
2002, amid dissatisfaction with the worsening security situation and the inability of
the prime minister to hold parliamentary elections as scheduled, King Gyanendra
dismissed the prime minister and the cabinet and assumed “temporary executive
authority.” One week later, the king chose royalist Lokendra Bahadur Chand to serve
as prime minister. The king replaced Chand with Surya Bahadur Thapa over the
objections of the main parties in June of 2003. Prime Minister Surya Bahadur Thapa
ended his term as Prime Minister on May 7, 2004. He was replaced by the king’s
former Prime Minister Sher Bahadur Deuba. Former Prime Minister Deuba was
placed under house arrest on February 1, 2005. While the state of emergency was
lifted in April 2005, human rights and pro-democracy advocates remained concerned
with the king’s continued control. This report will be updated.

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Contents
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The King’s Takeover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Maoist Reaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Political Reaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Human Rights Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Context to the Takeover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Key Country Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Political Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Constitutional Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Maoist Insurgency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Geopolitics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
U.S.-Nepal Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
U.S. Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Human Rights Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Figures
Figure 1. Map of Nepal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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Nepal: Background and U.S. Relations
Recent Developments
King Gyanendra of Nepal, who declared a state of emergency and assumed
control of the country on February 1, 2005, recently “lifted” the state of emergency
on April 30, 2005. The state of emergency had, according to the king, been imposed
to defeat the Maoist insurgency. From February to May 2005, an estimated 655
people were killed as the result of continuing conflict between security forces and
rebel Maoists.1 In total, the conflict with the Maoists is thought to have led to the
death of over 11,500 in Nepal since 1996.
Reportedly, the king thought he could take advantage of a split in the Maoist
leadership and continuing disarray amongst democrats to seize control and use the
Royal Nepal Army to defeat the Maoists.2 It is also reported that the king’s
government has encouraged local militias to destroy the homes of suspected Maoist
sympathizers.3 The seizure of power by the king appears in practice to have been
aimed as much, if not more so, at asserting the king’s control over democratic
elements as attempting to assert authority over the Maoists. Many observers have felt
that a military solution to the conflict with the Maoists is not achievable and that a
concerted effort by the king and the democrats is needed to establish a unified front
to defeat the Maoists. Despite setbacks, the Maoists appear committed to undertaking
large scale attacks.4
Human rights activists have voiced their concern that the “lifting” of the state
of emergency was a tactic aimed at placating the international community,
particularly the United States, the United Kingdom, and India. When the King
assumed power he stated that he would take steps to reinstate a constitutional
democracy within 100 days, which he failed to do. While some political prisoners
have been released by the king hundreds of others reportedly remain under arrest and
restrictions on civil liberties, such as public assembly and freedom of the press,
remain in place. Human rights advocates are urging the United States not to sell arms
to Nepal.5 A new United Nations Office of the High Commissioner of Human Rights
1 “US to Press Nepal on Democracy During Rocca Visit,” Reuters, May 9, 2005.
2 Chitra Tiwari, “India Delivers Arms to Nepal,” The Washington Times, May 14, 2005.
3 John Morris, “The Nepal Problem,” The Asian Wall Street Journal, May 23, 2005.
4 “US Envoy Warns Political Crisis in Nepal Could Benefit Maoists,” BBC News, May 24,
2005.
5 “US Urged not to Supply Military Weapons to Nepal,” Agence France Presse, May 9,
(continued...)

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team was established in Nepal in April to monitor the observance of human rights
and international humanitarian law.6 The team is to be headed by Ian Martin and will
expand from 12 to an expected 50 monitors in five development regions across
Nepal.7
India appears to be increasingly concerned with events in Nepal and there are
signs China may seek to leverage the situation to gain influence. There has been
some confusion as to whether India has resumed arms sales to Nepal. Foreign
Minister Natwar Singh stated on May 9, 2005, that “the supply of arms to Nepal is
under constant review.”8 I t was subsequently reported that military assistance in the
form of vehicles, night vision goggles, and bullet proof vests would resume
contingent on an agreement between the king and the government of India.9 It has
also been reported that India is concerned with possible growing ties between
Nepalese Maoists and Indian radicals.10 Maoist faction leader Baburam Bhattarai is
also reported to have met with the General Secretary of the Communist Party of
India.11 It has been reported that the king turned to Pakistan and China for military
assistance in the wake of India’s and Britain’s decision to halt arms sales to Nepal.12
Pakistan ruled out arms for Nepal on May 4, 2005.13 China has viewed the king’s
takeover as an internal affair for Nepal. Chinese Foreign Minister Li Zhaoxing’s visit
to Nepal on March 31, 2005, was the most senior high level visit to Nepal in the
aftermath of the king’s power grab in February. China’s motive for seeking influence
in Nepal may be limited to gaining Nepal’s support on the issue of Taiwan and to
promote stability in a bordering region. It could also be related to larger geopolitical
rivalry with India and possibly be aimed at neutralizing what may be viewed by
China as rising Indian and American influence in Nepal. Nepal has supported
China’s anti-secession law on Taiwan and recently closed the Dalai Lama’s office in
Kathmandu.14
The American response has focused on the need to restore democracy and civil
society. Assistant Secretary of State for South Asia Christina Rocca traveled to
Nepal in early May where she had a “productive” meeting with the king. At that time
5 (...continued)
2005.
6 “UN High Commissioner for Human Rights Appoints Chief for Nepal Monitoring
Operation,” M2 Presswire, April 29, 2005.
7 “UN Rights Monitoring Chief Arrives in Kathmandu,” Xinhua News Agency, May 8, 2005.
8 “India Says Resumption of Arms Supplies to Nepal Under Constant Review,” Agence
France Presse, May 7, 2005.
9 “Koirala Visit May Help Revive Democracy,” Hindustan Times, May 29, 2005.
10 Chitra Tiwari, “India Delivers Arms to Nepal,” The Washington Times, May 14, 2005.
11 “Nepali Maoist Meets Indian Marxist,” Inter Press Service, May 31, 2005.
12 Chitra Tiwari, “India Delivers Arms to Nepal,” The Washington Times, May 14, 2005.
13 “Pakistan Envoy Rules out Arms for Nepal,” BBC News, May 4, 2005.
14 David Wiencek, “China’s Geopolitical Maneuvering in the Himalayas,” China Brief, The
Jamestown Foundation, May 10, 2005.

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she described American goals for Nepal as simply; “we want Nepal to be a peaceful,
prosperous and democratic country where civil liberties and human rights are
protected.” The United States has provided $22 million in security assistance over
the past four years to Nepal and has increased development assistance to $42 million
annually. Unlike Britain and India, the United States did not announce a policy to
cut arms to Nepal in the wake of the king’s reassertion of control in Nepal though the
policy of supplying lethal assistance was placed under review. Nonlethal military
assistance remains unaffected.15 In 2005, $4 million was requested in Foreign
Military Financing and $650,000 was requested for International Military Education
and Training for Nepal for FY2006.16 Britain had planned to give Nepal a package
of military equipment to fight the Maoist insurgency in January 2005 but halted the
military assistance after the events of February. Britain has given the Royal Nepal
Army bomb disposal equipment since the decision to stop lethal military assistance
was taken.17
The King’s Takeover. King Gyanendra declared a state of emergency and,
with the assistance of the Royal Nepal Army (RNA), seized power on February 1,
2005. Reportedly, troops patrolled the streets of Kathmandu, internet and telephone
lines were cut, and newspapers were warned against printing anything critical of the
state of emergency. The king dismissed government, detained opposition leaders,
and appointed a crisis cabinet that is to report to him directly. It is thought by some
that by moving against the democrats the king has strengthened the position of the
Maoists. By some estimates almost half of the RNA is now occupied with palace
security, civil administration and efforts to restrict communications and civil rights.18
If human rights abuses by the king’s government leave his regime isolated from the
international community, his ability to successfully fight the Maoists may be further
constrained. The king’s legitimacy with the people has been weak due to the
circumstances under which he assumed the throne and due to the perception of the
people that his son, Prince Paras Shah, has “a reputation for drunken thuggery.”19
The role that the RNA has played in the takeover by the king appears to add a new
dimension to what has been a three-way political struggle between the king, the
democrats, and the Maoists.20
15 “US Maintaining Non-Lethal Security Assistance to Nepal,” BBC News, May 25, 2005.
16 FY 2006 Congressional Budget Justification for Foreign Operations, Department of State,
Released February 15, 2005.
17 “UK Clarifies Reports on Resumption of Military Aid to Nepal,” BBC News, May 31,
2005.
18 S.D. Muni, “Thy Hand, Great Monarch!” The Hindustan Times, February 8, 2005.
19 Nepal: A Country Report, The Economist Intelligence Unit, February 2005.
20 John Lancaster, “King Claims Absolute Authority in Nepal,” The Washington Post,
February 2, 2005.

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NEPAL IN BRIEF
Population: 27,070,666 (July 2004 est.); growth rate 2.23% (2004 est.)
Area: 147,181 sq. km. (about the size of Tennessee)
Capital: Kathmandu est. population of 1.5 million
Ethnic Groups: Brahman, Chetri, Newar, Gurung, Magar, Tamang, Rai, Limbu, Sherpa,
Tharu, et al.
Language: Nepali (official); about 12 others
Religion: Hindu 86%; Buddhist 8%; Muslim 4%
Life Expectancy at Birth: 59.4 years (2004 est.)
Literacy: total 45.2%; female 27.6%; male 62.7% (2003)
Per Capita income: $242
Poverty: 38% of the population are estimated to be below the poverty line.
Gross Domestic Product: $5.82 billion with 2.6% growth (2003est.)
Inflation: 4.8% (2004 est.)
Sources: CIA World Fact book; Reuters News; U.S. Departments of Commerce and State; World Bank;
Asian Development Bank; Global Insight.
Maoist Reaction. From February 13 to 27, 2005, the Maoists blockaded
major highways linking the country’s 75 districts as well as international road links
to India and China in protest of the king’s actions.21 This led to clashes between
Maoists and the RNA and reportedly brought trade by road to a standstill. The army
organized armed convoys which allowed limited trade to continue.22 The Maoists
had earlier cut off land routes to Kathmandu in August, 2004.23 During the week-
long blockade in 2004 prices of some basic foods more than doubled and fuel was
rationed.24 This increase in food prices reportedly recurred in the 2005 blockade. By
blockading Kathmandu, the Maoists are likely to increase pressure on the king’s
government. They have threatened to repeat the blockade if the king does not reverse
policy and restore political power to the parties.25 On June 6, 2005, the Maoists
exploded a bomb under a crowded bus crossing a bridge which killed 38 and injured
over 70. Maoist leader Prachanda subsequently stated that the attack was aimed not
at civilians but at military personnel.26
The American Embassy in Kathmandu issued a message warning of a threat to
Americans in Kavre District. Maoist cadres in Kavre District evidently have been
instructed to arrest Americans traveling there. The warning noted that it is unclear
if the threat applies to other Maoist controlled areas. The Embassy has warned
21 “Maoist Blockade Creates Chaos in Nepal,” Hindustan Times, February 22, 2005.
22 “Nepal Rebels Attack Highway Convoy,” Reuters, February 20, 2005.
23 “Maoist Rebels Cut off Kathmandu,” ABC Radio Australia, August 8, 2004.
24 “Bombs on the Tennis Courts, No Petrol in the Pumps,” The Economist, August 28, 2004.
25 “Maoists Call off Blockade,” WMRC Daily, February 28, 2005.
26 Binaj Gurubacharya, “Nepal Rebels Admit Mistake in Civilian Blast,” Associated Press,
June 7, 2005.

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CRS-5
Americans against traveling by road outside the Kathmandu valley.27 A Maoist
commander in the Parsa District has threatened attacks against Americans and
American interests.28
Political Reaction. Few appeared to be in a position to mount opposition to
the king’s assumption of power in the immediate aftermath of the takeover. Four
editors of Nepali newspapers were brought in for questioning after their papers
published blank spaces where they normally published editorials. Six other
journalists are known to have been put in detention since the takeover. In a
demonstration of solidarity, members of the Nepali Bar Association reportedly
accompanied the editors to their questioning.29 Party Member Secretary Arjun
Thapa, who escaped Nepal in February 2005, stated that the Nepali Congress’
position is that a new constitution be drafted through a constitutional assembly of all
key political stakeholders that incorporates political demands of the Maoists. The
Nepali Congress Party also demanded that the king revoke the state of emergency,
release all political prisoners, reinstate communications, recall parliament, and form
an interim government headed by former Prime Minister Deuba.30
There are signs that opposition to the king within democratic elements of Nepali
society is coalescing. Nepal’s seven main political parties announced on May 8,
2005, that they will work together to reform the constitution, reinstate parliament,
which has been dissolved since 2002, and limit the powers of the king.31 It has been
reported that the Maoists under Pranchanda support this alliance against the king.
American Ambassador James Moriarty stated that “the confrontation between the
king and the political parties will make it much easier for the Maoists to make
advances.”32 The President of the Nepal Bar Association gave his support for the
Supreme Court Bar Association’s call on the nation’s lawyers to boycott the Royal
Commission for Corruption Control which was set up after the king took power in
February. The corruption commission has the power to investigate, prosecute, and
sentence. Former Prime Minister Deuba remained under arrest on June 1, 2005, after
he refused to pay bond to the Commission for his alleged involvement in corrupt
practices.33
27 “Warden Message: Warning of Threat to Americans in Kavre District,” Consular Affairs
Bulletin Report, U.S. Embassy Kathmandu, March 1, 2005.
28 “Maoist Commander Threatening Attacks Against Americans,” Warden Message,
Overseas Security Advisory Council, May 25, 2005.
29 “Nepalese Editors Summoned Over Blank Spaces in Papers,” Agence France Presse,
February 23, 2005.
30 “Nepali Congress Demands New Democratic Constitution,” Press Trust of India,
February 22, 2005.
31 “US Envoy Meets Nepalese Leaders in Kathmandu,” Voice of America, May 9, 2005.
32 Binaj Gurubacharya, “US Diplomat Warns Confrontation Between King and Political
Parties Will Benefit Rebels,” Associated Press, May 25, 2005.
33 “Nepal’s Lawyers to Boycott Anti-Corruption Commission,” Press Trust of India, June1,
2005 and “Nepal Press Selection,” BBC News, June 1, 2005.

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CRS-6
Human Rights Concerns. Human rights groups warned in the aftermath of
the king’s February take over that Nepal is “plunging deeper into a massive human
rights crisis” with “arbitrary arrests, censorship, and general repression” with
“suspended fundamental constitutional rights including the freedom of assembly.”
As of February 9, 2005, a large number of opposition politicians, human rights
activists, student leaders and trade unionists had been arrested in the wake of King
Gyanendra’s takeover.34 Human rights groups assert there is a history in Nepal of
people disappearing after being brought into custody for political reasons. As a
result, there is concern for those still in detention.35 A February 2005 report by the
International Crisis Group has stated that Nepal’s record on “disappearances and
extra-judicial killings is one of the world’s worst.”36 The report also predicts that the
king’s actions will intensify the civil war and aid the Maoists while also providing
an opportunity for the international community to play a constructive role. On
February 24, 2005, the European Parliament reportedly adopted a resolution strongly
condemning King Gyanendra’s takeover and recommended that a neutral third party,
such as the United Nations, should arbitrate.37
The Context to the Takeover. The security situation in Nepal has been
deteriorating since the collapse of the ceasefire between the Maoists and the
government on August 27, 2003. The death toll from the conflict with the Maoists,
which began in 1996, has risen to over 11,500 by some estimates. The Maoists favor
drafting a new constitution that would likely abolish the monarchy. The king
opposes such a move and wants the Maoists to relinquish their weapons.
Accommodation between the king and democratic elements had been thought to be
key to creating the unified front necessary to defeat the Maoists. With his direct
assumption of powers, and arrest of opposition democratic elements, the King has
apparently decided to try to defeat the Maoists on his own. Observers have thought
a military victory for either the Royal Nepal Army (RNA) over the Maoists to be
unlikely.
Analysts increasingly view differences between King Gyanendra and the main
political parties as undermining Nepal’s ability to deal with its ongoing Maoist
insurgency. King Gyanendra first declared a state of emergency in November 2001
and dissolved Parliament and assumed executive power in October 2002. The lack
of elections undermined the legitimacy of the government appointed by the king.
Political protest by the main political parties mounted in the spring of 2004 over the
increasing assumption of power by the king. Monarchist Prime Minister Surya
Bahadur Thapa stepped down amid these protest on May 7, 2004. Elections have not
been held due to the state of emergency in the country even though pledges have been
34 “Nepal: Danger of ‘Disappearances” Escalates,” Human Rights Watch, February 9, 2005.
35 “Nepal: Media Blackout Heightens Risk of Abuses,” Human Rights Watch, February 16,
2005.
36 Nepal: Responding to the Royal Coup, International Crisis Group, 24 February 2005.
37 “Nepal: After Monarchist Coup d’etat in Nepal, Parliament Foresees Mediation by Javier
Solana or UN,” Agence Europe, February 26, 2005.

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CRS-7
made to hold them.38 The king will have difficulty holding elections as long as the
Maoists control much of the countryside. Fighting between Maoists and government
forces was reported in eastern, north central, and southwestern districts in February
2005.39
Programs associated with the United States have been threatened by the Maoists
in the past.40 The United States Agency for International Development and Save the
Children both operate in Nepal. On October 27, Maoist leader Prachanda stated that
“we will ensure that no American citizens — tourists or officials — except those who
come to the battlefield with the Nepal Army would be caused any harm by the Maoist
militia.”41 Despite such reassurances, the U.S. government identified the Maoists as
a threat to American national security and froze Maoists assets and warned
Americans in Nepal of “the possibility of an increased threat to Americans and
American-affiliated organizations from Maoist insurgents.”42
Political instability and insurgency-related violence has undermined the
country’s economy. In one estimate, it has been reported that Nepal has lost 15.4%
of its gross domestic product over a seven year period.43 According to a close advisor
of the Nepali king, and chairman of the country’s largest private company, “Nepal
is on the verge of becoming a failed state.”44 U.S. government officials have
expressed similar fears, and assert that further deterioration of Nepal’s circumstances
could destabilize the region, spur new tensions between India and China, and
potentially create a new terrorist haven in South Asia.45
Politics
Nepal is engaged in a political struggle with monarchists, the political parties
and Maoists all vying for control. The military also appears to be playing an
increasingly important role. The Maoists are seeking a constituent assembly to
38 Charles Haviland, “Nepal’s Embattled PM,” BBC News, May 7, 2004.
39 “12 Maoists Killed in Clash with Soldiers in Eastern Nepal,” Agence France Presse,
February 22, 2005. “7 Die as Maoist Rebels Attack Convoys in Nepal,” Vancover Sun,
February 22, 2005.
40 Kedar Man Singh, “Nepal’s Maoist Rebels Say They Will Not Carry Out Political
Killings,” Agence France Presse, October 22, 2003.
41 Kedar Man Singh, “Nepal Maoists Say Americans Safe,” Agence France Presse, October
27, 2003.
42 “United States Declares Nepalese Maoists a National Security Threat, Freezes Assets,”
Agence France Presse, October 31, 2003.
43 “Studies Show Conflict Costing Nepal Billions,” BBC News, October 30, 2003.
44 Binod Bhattarai and Edward Luce, “Nepal’s New Premier Unmoved by Clamor at
Parliament’s Gates,” Financial Times (London), November 21, 2002.
45 Such concerns were expressed in May 2003 by the U.S. Deputy Assistant Secretary of
State for South Asia, Donald Camp (Campbell Spencer, “Nepal Rebels’ Patience ‘Wearing
Thin,’” Washington Times, May 3, 2003. See also Bertil Litner, “Nepal’s Maoists Prepare
For Final Offensive,” Jane’s Intelligence Review, October 2002).

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achieve politically what they have thus far been unable to gain on the battlefield. The
political parties seek a return to Parliamentary rule while the king has preferred an
influential role in government. “An alliance between any two of the three contending
groups is likely to determine Nepal’s future.”46 The king’s takeover in February 2005
makes any alliance between the king and the democrats seem remote and may serve
as a catalyst for an alliance among democratic elements. A July 2004 poll found that
60% of Nepalis favor democracy under a constitutional monarchy, 17% favor
democracy without a monarchy, and only 2% favor a return to absolute monarchy.47
The relationship between the political parties and the king began to come apart
in late 2002. On October 4, 2002, amid dissatisfaction with the worsening security
situation and the inability of Prime Minister Deuba’s government to hold
parliamentary elections as scheduled, King Gyanendra dismissed the prime minister,
disbanded his cabinet, and assumed executive powers, while pledging to relinquish
his authority once a new government was formed. (Deuba has since been
reappointed and dismissed for a second time as prime minister.) This event marked
the first time since absolute monarchy was ended in 1990 that a Nepali king
dismissed an elected government and assumed direct power; the move thus stunned
the main political parties in Nepal and led to a constitutional debate. While the king
claimed that his decision was in accordance with his constitutional power to dismiss
the government during a political crisis, the ousted prime minister and key political
parties denounced the action as unconstitutional. In the days following Deuba’s
dismissal, thousands of Nepalis took to the streets of Kathmandu to demonstrate their
opposition to the king’s decision and demand the speedy restoration of democracy.
Smaller demonstrations were held in support of the king.48 No large scale
demonstrations were held in the immediate aftermath of the king’s February 2005
takeover.
One week after his assumption of executive power in 2002, King Gyanendra
met with senior political leaders to discuss formation of a new government, and he
subsequently chose Lokendra Bahadur Chand, a member of the royalist, right-wing
National Democratic Party and former premier, to oversee a caretaker cabinet until
new elections could be held. The United States extended its best wishes to the new
government and pledged its continued support in Nepal’s anti-terrorism efforts.49
Leading Nepali political figures, including Deuba, denounced the appointment as an
“undemocratic exercise,” and more pro-democracy demonstrations involving tens of
46 “Nepal,” Economist Intelligence Unit, August, 2003.
47 Nepal: Responding to the Royal Coup, International Crisis Group, February 24, 2005.
48 Binaj Gurubacharya, “Nepal King Fires Prime Minister,” Associated Press Newswire,
October 4, 2002; Y.P. Rajesh and Gopal Sharma, “Ousted Nepal PM Brands Dismissal
Unconstitutional,” Washington Post, October 5, 2002; Y.P. Rajesh, “Nepal Protesters
Demand King Restore Democracy,” Reuters News, October 8, 2002; Sushil Sharma, “Anti-
King Protests in Nepal,” BBC News, November 26, 2002.
49 “Senior US Official Meets New Nepal Premier, Extends Support,” BBC Monitoring
South Asia, October 22, 2002.

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CRS-9
thousands of Nepalis were held in December and January.50 A May 2003 rally saw
some 50,000 citizens gather to denounce the king and reiterate their demands for
democracy.51
The possibility of a reconciliation between the king and the political parties was
set back when the king refused to accept the parties’ recommendation for Prime
Minister following Chand’s resignation. The king instead selected Surya Bahadur
Thapa to be his Prime Minister. Anti-monarchical protests from the five main parties,
which seek a full restoration of parliament, brought significant pressure to bear on
the king in late 2003 and early 2004.52 Maoists are reported to have sought to make
common cause with the main parties against the king at that time.
On July 13, 2003, Thapa called for a third round of negotiations with the
Maoists. Nepalese government authorities’ subsequent temporary detention of a
chief Maoist negotiator Bharat Dhungana led to the closing of the Maoist rebel
contact office in Kathmandu and put a third round of negotiations in doubt.53 The
third round did transpire in mid-August 2003.54 The negotiations stalled on several
points. The Maoists favor a constituent assembly to establish a new constitution and
redefine the role of the king. The government opposes this, but has offered to include
Maoists in an interim government and to call new elections. The government has also
indicated that a negotiated agreement must include a plan for Maoists to disarm.
Chief Maoist negotiator Babu Ram Bhattarai stated that, “It is very unlikely the talks
will lead to any fruitful end.”55 Maoist “Supremo” Prachandra has stated that “we are
not going to agree to anything less than a constituent assembly.”56 The collapse of
negotiations led to renewed fighting between Maoists and Royal Nepal forces.
Key Country Issues
Governance
Political Background. Nepal, the world’s only officially Hindu country, has
been an independent kingdom since 1768. Never colonized, the country was almost
totally isolated from outside influence until the early 1950s. A transition from strict
50 “Nepal Parties React Strongly to New Government,” Asia Pulse (Sydney), October 11,
2002; Sushil Sharma, “Thousands Protest Against Nepal King,” BBC News, December 15,
2002; “Thousands Urge Nepal King to Revive Parliament,” Reuters News, January 13, 2003.
51 “Opposition Rallies in Nepal,” New York Times, May 5, 2003; Daniel Lak, “Nepal King
Facing Cabinet Protest,” BBC News, May 5, 2003.
52 “Fresh Round of Nepal Anti-Monarchy Protests,” BBC Monitoring South Asia, August
16, 2003.
53 Stratfor, “Maoist Warriors Await Outcome of Nepal Peace Talks,” July 24, 2003.
54 “Third Meeting Over,” Nepal News.com, August 18, 2003.
55 “Nepal Rejects Key Maoist Demands,” Irish Times, August 18, 2003.
56 “Nepal ‘Maoist Supremo’ Prachandra Pessimistic on Talks,” BBC Monitoring South Asia,
August 18, 2003.

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CRS-10
king’s rule to constitutional monarchy began in 1959, when then-King Mahendra
issued a new constitution and held the country’s first democratic elections. In 1960,
however, the king declared the parliamentary system a failure, dismissed the
fledgling government, suspended the constitution, and established a partyless system
of rule under the monarchy. Although officially banned, political parties continued
to exist and to agitate for a return to constitutional democracy.
In February 1990, student groups and the major political parties launched the
Movement for the Restoration of Democracy. The centrist Nepali Congress (NC)
party joined with the leftist parties to hold peaceful demonstrations in Nepal’s few
urban centers. In April 1990, after more than 50 people were killed when police fired
on a crowd of demonstrators, then-King Birendra turned power over to an interim
government. This government drafted a constitution in November 1990 establishing
Nepal as a parliamentary democracy with a constitutional monarch as head of state.
The king at that time retained limited powers, including the right to declare a state
of emergency with the approval of a two-thirds majority of parliament.
Nepal’s first decade of democracy was marked by political turbulence in which
three parliamentary elections were held and nine governments came to power.57 In
the third parliamentary elections in May 1999, NC president and former Prime
Minister Girija Prasad Koirala agreed to support Krishna Prasad Bhattarai as prime
minister. However, in mid-March 2000, rivalry between the two leaders and party
dissatisfaction led to Bhattarai stepping down. On March 20, King Birendra
appointed Koirala prime minister for a fourth time.
The Kathmandu government faced additional turmoil in June 2001, when
Crown Prince Dipendra reportedly shot and killed his parents, King Birendra and
Queen Aishwarya, seven other members of the royal family, and himself, after a
disagreement over whom he should marry. King Gyanendra, the former king’s
brother, was crowned on June 4 and he appointed a commission to investigate the
assassination. By mid-June, the country began returning to normal following rioting
and widespread refusal to believe official accounts of the massacre. In July 2001,
Prime Minister Koirala stepped down amid fears of continuing instability and his
government’s failure to deal with the growing Maoist insurgency. He was replaced
by NC leader Sher Bahadur Deuba, who then became the head of Nepal’s eleventh
government in as many years.
Constitutional Crisis. During the summer of 2002, the government of Nepal
was thrown into a constitutional crisis that, many argue, has interfered with its ability
to effectively combat the Maoist insurgency. The crisis began in late May, when
King Gyanendra, at the request of the prime minister, dissolved parliament and
unilaterally declared a three-month extension of emergency rule, which had expired
57 The bicameral parliament consists of a 205-seat House of Representatives (Lower House),
whose members are elected by popular vote to serve five-year terms; and a 60-seat National
Assembly (Upper House), whose members are appointed (10 by the king, 15 by an electoral
college, and 35 by the House of Representatives). For the purpose of this report,
“parliament” refers to the House of Representatives, which is the main focus of legislative
reporting.

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CRS-11
on May 24. The prime minister, who also scheduled early elections for November
2002, reportedly took such action after his centrist Nepali Congress party refused to
support his plan to extend emergency rule. Following the prime minister’s actions,
56 former members of parliament filed a lawsuit against the prime minister, claiming
that there was no constitutional precedent for the dissolution of parliament during
emergency rule. In August, the Supreme Court rejected this lawsuit. Although
opponents of the prime minister agreed to accept the verdict, they emphasized the
difficulty of holding free and fair elections two years ahead of schedule when much
of the country was under either rebel or army control.58
Meanwhile, these events effectively split the Nepali Congress into two factions.
First, the Nepali Congress Party (NC), led by former Prime Minister Koirala,
expelled Deuba from the party for three years for his unilateral actions. Then, in
mid-June, Prime Minister Deuba called an NC convention that overturned his
expulsion and elected him, rather than Koirala, as NC president. Supporters of
Koirala, however, argued that the NC convention led by Deuba, who was an expelled
party member at the time, was invalid. In September, Nepal’s Election Commission
ruled that Koirala was the president of the NC, and, therefore, his faction was
authorized to use the party’s name and emblems in the November elections. In
accordance with the Election Commission’s ruling that allowed it one week to apply
under a new party name, the Deuba-led faction registered as the Nepali Congress
(Democratic) party on September 23.59 Given that almost 60% of the population is
illiterate, use of the NC emblems could be a significant advantage for the Koirala
faction in future elections. On the other hand, some observers speculate that the
ruling party split may benefit the Nepal Communist Party-United Marxist and
Leninist (NCP-UML) party, the country’s second largest.60
Although the prime minister pledged that there would be no emergency rule
during the scheduled November 2002 elections, Maoist attacks and threatened strikes
prompted the government to consider various measures to prevent a Maoist
disruption of the polls. The government discussed imposing a partial state of
emergency in areas badly affected by the insurgency. However, opposition parties,
which urged the government to open a dialogue with the Maoists, argued that by
curbing civil liberties, emergency rule would inhibit free and fair elections. As an
alternative, the government announced in September that it would hold the elections
in six stages over two months, starting in mid-November, so that government troops
could be transferred around the country to protect voters and candidates.61 After
58 “Parties React to Court Ruling Backing PM’s Right to Dissolve Parliament,” BBC
Monitoring South Asia, August 7, 2002; Shusham Shrestha, “Nepal PM’s Foes
Begrudgingly Accept Court Approval of Early Elections,” Agence France-Presse, August
7, 2002.
59 “Nepal’s Embattled PM Forms New Political Party,” Reuters News, September 23, 2002.
60 Kedar Man Singh, “Nepal Says PM is not Head of Ruling Party, Hands Title to Foe,”
Agence France-Presse, September 17, 2002; “Nepal Poll Panel Rejects PM as Head of
Ruling Party,” Reuters News, September 17, 2002.
61 Binaj Gurubacharya, “Nepal to Hold Elections in Stages,” Associated Press Newswire,
(continued...)

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CRS-12
further deliberation, however, Nepal’s cabinet concluded that the security situation
was too risky to hold elections. On October 3, the cabinet asked King Gyanendra to
postpone the national elections for one year.62 The next day, he dismissed the prime
minister, disbanded his cabinet, and assumed executive powers.
Maoist Insurgency
In February 1996, the leaders of the underground Communist Party of Nepal
(Maoist) and the United People’s Front (UPF) launched a “People’s War” in the
midwestern region of Nepal, with the aim of replacing the constitutional monarchy
with a one-party Communist regime. Over 10,000 people, including civilians,
guerrillas, and security personnel, reportedly have been killed in the ensuing
insurgency. The uprising appears to have been fueled by widespread perceptions of
government corruption and failure to improve the quality of life of citizens, including
providing access to cultivable land. The Maoist movement is estimated to include
between 5,000 and 10,000 armed fighters and to control a substantial proportion
Nepal.63 By some estimates the Maoists run a parallel government, setting up their
own tax system, burning land records, and redistributing seized property and food to
the poor, in 45 districts.64 The King of Bhutan is reported to have stated that the
Maoists control 69 of 75 districts in Nepal.65 The insurgency has been waged, in part,
through torture, killings, and bombings targeting police and public officials. Some
analysts have equated the insurgency with the Shining Path movement in Peru. A
string of bank robberies, combined with “revolutionary tax” revenue, has made the
Nepali Maoists among the wealthiest rebel groups in Asia, with up to $128 million
in net receipts.66 The Maoists control over Nepal “has been steadily increasing.”67
Shortly after Prime Minister Deuba took office in July 2001, the Nepali
government and the Maoists announced a truce and began peace talks the following
month. After three rounds of promising discussions, talks broke down over the
Maoists’ demand that the monarchy be eliminated. On November 23, 2001, the
Maoists broke the cease-fire with coordinated attacks on army and police posts.
Three days later, King Gyanendra declared a state of emergency, which allowed the
61 (...continued)
September 28, 2002.
62 Gopal Sharma, “Nepal Cabinet Seeks to Put Off Elections by a Year,” Reuters News,
October 3, 2002.
63 Philip Pan, “China Backs Nepal Over Maoist Rebels,” Washington Post, July 14, 2002;
Bertil Litner, “Nepal’s Maoists Prepare For Final Offensive,” Jane’s Intelligence Review,
October 2002; Binod Bhattarai and Edward Luce, “Nepal’s New Premier Unmoved by
Clamor at Parliament’s Gates, Financial Times (London), November 21, 2002.
64 Aniket Alam, “Abductions, a Political Message by Maoists? The Hindu, January 23, 2005.
65 G.S. Iyer, “Nepal Policy Lacks Cogency,” The Hindu, February 22, 2005.
66 Bertil Litner, “Nepal’s Maoists Prepare For Final Offensive,” Jane’s Intelligence Review,
October 2002.
67 International Institute of Strategic Studies, The Military Balance, 2004-2005, (London:
Oxford University Press, 2004), p.148.

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CRS-13
Royal Nepal Army (RNA), then at a strength of 53,000, to join the police in fighting
the insurgents. The poorly trained, largely ceremonial RNA, however, was unable
to stem the increasing Maoist violence. Plans have been underway to expand the
force, thought to number at least 72,000, and to provide them with enhanced
training.68 The state of emergency was extended for three months in February and
again in May 2002. The government also passed the Terrorist and Disruptive
Activities (Control and Punishment) Bill in April, which replaced an anti-terrorism
ordinance issued at the time of the first declaration of emergency. The new law
makes terrorism a crime punishable by life in prison and allows government forces
to detain terrorist suspects for an extendable 90-day period.69
After breaking the cease-fire, the Maoists staged numerous deadly attacks on
police and army posts, government facilities, and civilian areas, and forced the
country’s economy to a standstill in successive general strikes protesting the state of
emergency. A significant proportion of the deaths associated with the insurgency
have occurred since November 2001. Two of the deadliest battles came in May
2002, when, according to Nepali officials, up to 650 rebels and at least 100 soldiers
and police officers were killed. Following those clashes, the rebel commander,
Pushpa Kamal Dahal — also known as “Prachanda” or “the fierce one” — issued a
statement declaring a one-month cease-fire beginning May 15, 2002. Claiming that
the rebels have used cease-fires to regroup, the government of Nepal promptly
rejected the cease-fire offer and insisted that the rebels first lay down their arms.70
Critics of the Deuba government’s hard-line approach toward the Maoists argued that
it failed to address the rural poverty that underlies the Maoist campaign.71
After the state of emergency expired on August 28, 2002, the Maoists again
stepped up their attacks. During the first week of September, Maoist bombings and
battles with police officers and soldiers left more than 300 people dead. On
September 16, a general strike called by the Maoists shut down much of the country.
November clashes in areas to the west of Kathmandu involved rebel attacks on police
stations and administrative headquarters and caused at least 200 deaths, including
some 60 security personnel.72 Along with this accelerated pace of violence, there
68 John Kifner, “A Magical Kingdom’s Bleak Political Realm Grappling with a Wobbly
Cease Fire,” The New York Times, August 4, 2003. International Institute of Strategic
Studies, The Military Balance, 2004-2005 (London: Oxford University Press, 2004), Some
reports place the strength of the RNA at 78,000, see Neelesh Misra, “Nepalese Soldiers,
Famous for Keeping Peace, Learn to Wage War,” Associated Press, February 26, 2005.
69 Binaj Gurubacharya, “Nepal Parliament Approves Anti-Terrorism Bill,” Associated Press
Newswire, April 4, 2002.
70 Neelesh Misra, “Government Rejects Maoists Cease-Fire Offer; Army Says Rebels
Withdraw From Western Stronghold,” Associated Press Newswire, May 9, 2002.
71 David Rohde, “Ousted by King, Nepal Premier Asks for Support,” New York Times,
October 6, 2002.
72 Kedar Man Singh, “Nepal Considers New Emergency After 300 Dead in Maoist Unrest,”
Agence France-Presse, September 11, 2002; Binaj Gurubacharya, “General Strike Shuts
Most of Nepal,” Washington Post, September 16, 2002; “Upsurge in Nepal Violence,” BBC
(continued...)

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CRS-14
were reports that sizeable Nepali army units had undergone anti-terrorist training in
India, while Maoists may have established a presence in nearby Indian states such as
Bihar. Intelligence reports also suggested that, in return for arms and training, Maoist
forces provide bases to rebel groups fighting New Delhi’s rule in India’s northeastern
Assam state.73 A cease fire was reached in January 2003. Fighting resumed in
August 2003 as the cease fire agreement collapsed.
Classical Maoism conceives three phases of protracted war: strategic defensive,
strategic stalemate, and strategic offensive. Although the insurgents’ tactical-level
efforts have had great successes thus far and represent a significant threat to the
Kathmandu government’s ability to govern, one late 2002 assessment indicates that
the rebels’ tactics may be ill-suited to urban combat, and that the Maoists may be
outstripping their supply resources.74
The Maoists’ message has called for “American imperialism” and the “dirty
Yankee” to “go home.” The Maoists’ Chief Negotiator, and Chairman of the
“People’s Government,” Baburam Bhattarai, reportedly threatened the United States
with “another Vietnam” if the United States expands its aid to Nepal.75 Bhattarai also
sent a letter to the U.S. Ambassador in Kathmandu which called on the United States
to stop “interfering” in the internal affairs of Nepal.76 Maoists claimed responsibility
for killing two off-duty Nepalese security guards at the American Embassy in
Kathmandu in 200277 and the Maoists have made it known that American trekkers
are not welcome in Maoist-controlled Nepal.78 Further, the Maoists stated on
October 22, 2003, that American-backed organizations would be targeted. Rebel
leader Prachanda is reported to have stated that groups funded by “American
imperialists” would not be allowed to operate in Nepal.79
72 (...continued)
News, November 15, 2002; Sushil Sharma, “Nepal Rebels ‘Suffer Heavy Casualties,’” BBC
News, November 23, 2002.
73 R. Bedi, “Maoist Battle to Control Nepal,” Jane’s Terrorism and Security Monitor,
November 2002.
74 John Mackinlay, “A Military Assessment of the Nepalese Maoist Movement,” Jane’s
Intelligence Review, December 2002.
75 Thomas Bell, “Maoist Army Wins Hearts and Minds in West Nepal,” The Globe and
Mail, September 18, 2003.
76 Binaj Gurubacharya, “Maoist Rebel Leader Asks U.S., China, India to Stop Interfering
in Nepal,” Associated Press, September 25, 2003.
77 Binaj Gurubacharya, “Nepal Rebels Threaten U.S.-Funded Groups,” Associated Press,
October, 22, 2003.
78 Amy Waldman, “Chance for Peace Fades in Nepal as Deaths Rise,” The New York Times,
October 13, 2003.
79 Binaj Gurubacharya, “Nepal Rebels Threaten U.S.-Funded Groups,” Associated Press,
October, 22, 2003.

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CRS-15
Economy
Nepal is one of the poorest countries in the world, with a per capita annual
income of about $242. Some 38% of the country’s 24 million people live in poverty
and up to 90% earn a living through agriculture, which accounts for roughly 40% of
the country’s gross domestic product. Only 20% of the land is arable. Major crops
include rice, wheat, maize, jute, sugarcane, and potatoes. Continued reliance on
subsistence farming could keep Nepal poor for many years to come. Though the
industrial base is small, Nepal produces carpets, garments, and increasingly textiles,
which now account for about 70% of merchandise exports. Other major revenue
sources are tourism and remittances from Nepal’s famed Gurkha soldiers serving in
the British and Indian armies.
For the first time in nearly 20 years, Nepal’s economy reportedly contracted by
0.6% in the fiscal year ending July 2002, an apparent result of the internal rebellion’s
impact on trade (including tourism) and manufacturing.80 This is compared to a 6.4%
economic growth rate for FY1999/2000 (ending in July). Nepal’s economic growth
equaled 2.6% in 2003. An IMF team forecast 3.5% growth for Nepal for the period
July 2004 to July 2005 based on a December 2004 visit to Nepal which took place
before the king’s February 2005 takeover.81 Growth is expected to drop in the wake
of the takeover by the king. Future economic prospects will likely be influenced by
the outcome of the peace negotiations underway with the Maoists and the king’s
ability to come to terms with the democrats.
Nepal’s long-term outlook is clouded by limited resources — both human and
natural — and an unfavorable geographic setting.82 An annual report by the Asian
Development Bank reflects the widespread belief that, “addressing the underlying
causes of the insurgency — widespread rural poverty and the failure to spread the
benefits of development more widely — is critical for Nepal’s development.”83
Government efforts to increase foreign trade and investment have been impeded by
political instability, the resistance of vested interests, the small size of the economy
and its remoteness, the lack of infrastructure and technological development, and
frequent natural disasters, including floods and landslides. The U.S. Agency for
International Development has estimated that the cost of the conflict to Nepal’s
economy at $1.5 billion in lost property and lost economic growth. USAID has also
estimated that Nepal’s defense expenditure have increased by 45% since 1997.84
Hydroelectric potential may be Nepal’s most attractive asset in the eyes of
investors. Nepal and India have completed several joint irrigation-hydroelectric
80 “Nepal Economy Hits 20-Year Low,” BBC News, December 11, 2002.
81 Nepal: Country Report, The Economist Intelligence Unit, February 2005.
82 “Nepal: Executive Summary,” Global Insight, October 10, 2002.
83 Asian Development Bank, “Asian Development Outlook 2003,” available at
[http://www.adb.org/documents/books/ado/2003/default.asp].
84 “Democracy and Governance: Update on the Conflict in Nepal,” USAID, February 24,
2005.

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CRS-16
projects and, in 2001, the Kathmandu government implemented a hydropower policy
that opened the entire sector to private investment. A number of factors, including
lack of capital, high transportation costs, environmental and social impact concerns,
and political impediments, continue to hamper Nepal’s hydropower potential, leaving
only 15% of the country’s population with access to electricity.
Nepal’s tourist industry has traditionally been an important part of the economy
and a key source of foreign exchange. However, due to the burgeoning Maoist
conflict, the royal family killings, and the September 2001 terrorist attacks on the
United States, tourist arrivals fell by 20% in 2001, and again by 28% in 2002, to
roughly 220,000. Recent government efforts to revive the industry include opening
up more mountain peaks to expeditions, reducing visa fees and easing visa
procedures.
Deforestation is one of the major environmental problems in Nepal. Between
1979 and 1994, Nepal’s forest cover declined from 38% to 29%. A 2001 report
prepared by the United Nations and the Nepali government cites several key causes
of deforestation: population growth, increased consumption of fuel wood, expansion
of grazing and agricultural land, internal migration, smuggling of logs into India, and
government forest policy. Rapid depletion of forest resources has contributed to
landslides, floods, erosion of agricultural lands, silting of waterways, and loss of
settlements and human life.85
Geopolitics
Nepal has been described as a yam between two boulders. Nepal’s geopolitical
status as a small, landlocked buffer state situated between two Asian giants — India
and China — has severely constrained its foreign policy and trade options. Although
Nepal has sought to maintain friendly relations with both neighbors, cultural,
linguistic, religious, and economic ties with India historically have been much closer
than those with China. Nepal is heavily dependent on India as the primary source of
imports, the main market for exports, and for access to the sea through the major port
of Calcutta. Moreover, the Himalayan mountain range along Nepal’s northern border
limits access to China, whereas the 500-mile southern border with India is relatively
open. India, which has always considered Nepal a strategic link in its northern border
defenses, has supported Kathmandu’s efforts against the Maoist guerrillas by
providing helicopters, transport vehicles, and arms and offering to train Nepali
soldiers.86 Some believe that India has the most to lose from Maoist advances in
Nepal, as New Delhi views Nepali instability as a potential catalyst for the
destabilization of India’s own troubled northeastern states.87
85 “Rampant Tree-Felling Shrinks Nepal’s Forest Cover,” Reuters News, March 27, 2001;
United Nations Environment Program, “Nepal: State of the Environment 2001,” available
at [http://www.rrcap.unep.org].
86 “India Pledged to Support Nepal in Rebel Fight,” Reuters News, August 23, 2002.
87 Mandavi Mehta and Nisala Rodrigo, “Nepal Update,” South Asia Monitor 53, Center for
Strategic and International Studies, December 1, 2002.

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CRS-17
At the same time, the Nepali leadership has long resented Indian economic
influence and has sought to establish a more independent foreign policy. Kathmandu
has at times “played the China card” in seeking to counterbalance what it considers
undue pressure from India. In recent years, Beijing has contributed significant
economic aid to Nepal — roughly $10 million per year — and has pledged “political
and moral” support for Nepal’s fight against the Maoist insurgency, which it
denounces as misusing the ideas of Chairman Mao Zedong. In November 2001,
Beijing agreed to provide communications equipment to assist the Nepal Army in
operating in mountainous terrain. Some observers have noted that Nepal’s stability
is important to China, given that it serves as a buffer between China and India.88 The
United States apparently supported India in taking a leading role in the situation in
Nepal in the wake of the February 2005 takeover by the king.89
U.S.-Nepal Relations
Relations between the United States and Nepal have traditionally been friendly.
With 25.1% of Nepal’s exports going to the United States, the United States is
Nepal’s second largest destination for exports. India is first with 53.3% of Nepal’s
exports.90 U.S. policy objectives toward Nepal include supporting democratic
institutions and economic liberalization, promoting peace and stability in South Asia,
supporting Nepalese independence and territorial integrity, and alleviating poverty.
The United States became Nepal’s first bilateral aid donor in January 1951 and has
since contributed more than $1.4 billion bilaterally and multilaterally to that country.
On January 26th, 2005, S. 191, the Tariff Relief Assistance for Developing
Economies Act of 2005, or the Trade Act of 2005, was referred to the Senate
Committee on Finance. The bill recognizes the challenges to least developed
countries (LDC) including Nepal, particularly with the end of the multi-fiber
arrangements, and would allow duty free access for products from Nepal and 13 other
LDCs.91
U.S. Assistance
U.S. attention to Nepal has focused on issues related to the Maoist insurgency
in recent years. The United States has provided Nepal with $22 million in light
weaponry and other military assistance to assist Nepal in its fight against the
88 Philip Pan, “China Backs Nepal Over Maoist Rebels; Move Reflects Beijing’s Growing
Interest in Fostering Stability, Not Revolution,” Washington Post, July 14, 2002.
89 “U.S. Wants India to Play a Leading Role in Nepal,” Press Trust of India, February 22,
2005.
90 Nepal: Country Report, The Economist Intelligence Unit, February 2005.
91 S. 191 Trade Act of 2005 as introduced in the Senate and “Bill Seeking Duty Free Access
of LDC Products Raised in US Congress,” Organization of Asia-Pacific News Agencies,
February 23, 2005.

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CRS-18
Maoists.92 The FY2006 request proposes an increase from $1,488,000 to $4,000,000
for Foreign Military Financing (FMF) for Nepal with a stable $650,000 for
International Military Education (IMET) and training for Nepal. U.S. military
assistance “will help provide a modernizing Royal Nepal Army with the capability
to convince the Maoists that they cannot follow the military path to political power.”
High priority items for FMF assistance to the RNA include “small arms, grenade
launchers ... night vision goggles, body armor, secure communications equipment,
spare parts for mobility platforms, and armor plating.” Nepal will be eligible to
receive grant excess defense articles in FY2006 under section 516 of the Foreign
Assistance Act. The United States also provides development assistance to Nepal
under the Child Survival and Health (CSH) programs, Development Assistance
(DA), and Economic Support Funds (ESF).93
The United States views the Maoists’ plans to institute a one party republic,
collectivize agriculture, reeducate class enemies and export revolution as
undermining regional stability as well as the promotion of democracy and
development for Nepal.94 The Consolidated Appropriations Act of 2005 (P.L. 108-
447) specifies that foreign military financing may be made available for Nepal if the
Secretary of State reports to the appropriate committees that Nepal is taking specific
steps to improve human rights and “end torture by security forces and to prosecute
members of such forces who are responsible for gross violations of human rights.”
The act also allows the Secretary of State to waive the requirements if she determines
that it is in the national security interest of the United States to do so. The full
relevant language of section 590 (c) is as follows.
NEPAL-
(1) The Congress deplores and condemns the Maoist insurgency in
Nepal which has engaged in widespread atrocities against civilians
and Nepalese security forces, and calls on other nations to denounce
these vicious acts.
(2) Funds appropriated under the heading ‘Foreign Military Financing
Program’ may be made available for assistance for Nepal if the
Secretary of State reports to the Committees on Appropriations that
the Government of Nepal:
(A) has determined the number of and is making
substantial progress in complying with habeas corpus
orders issued by the Supreme Court of Nepal, including all
outstanding orders;
92 Jahn Lancaster, “King Claims Absolute Authority in Nepal,” The Washington Post,
February 2, 2005.
93 “South Asia,” FY2006 Congressional Budget Justification for Foreign Operations,
Released February 15, 2005, United States Department of State.
94 “Christina Rocca Delivers Remarks at the Institute of Foreign Affairs,” Federal Document
Clearing House, May 10, 2005.

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CRS-19
(B) is cooperating with the National Human Rights
Commission of Nepal to identify and resolve all security
related cases involving individuals in government custody;
(C) is granting the National Human Rights Commission of
Nepal unimpeded access to all places of detention; and
(D) is taking effective steps to end torture by security
forces and to prosecute members of such forces who are
responsible for gross violations of human rights.
(3) The Secretary of State may waive the requirements of paragraph
(2) if he determines and reports to the Committees on Appropriations
that to do so is in the national security interests of the United States.
U.S. Assistance to Nepal, 2001-2006
(thousand dollars)
FY2002
FY2005
FY2006
Act.
FY2001 FY2002
FY2003
FY2004
S.A.a
est.
req.
CSH
9,250
20,000
—
19,899
24,840
23,540
23,000
DA
11,858
7,597
—
10,247
8,874
10,000
11,392
ESF
0
3,000
—
4,000
4,971
4,960
5,000
FMF
0
2,000
12,000
2,950
3,975
1,488
4,000
IMET
237
377
—
500
546
650
650
Peace
1,735
2,111
—
2,624
2,108
394
0
Corps
Totals 23,080
35,085
12,000
40,220
45,314
41,032
44,042
Food Aid (not including freight costs)
P.L.
0
2,352
—
0
0
1,000
0
480
Title II
Grant
FFE
—
—
—
2,130
0
n/a
n/a
Sec.
2,666
0
—
0
0
n/a
n/a
416(b)
Sources: CRS Report RL31362, U.S. Foreign Aid to East and South Asia: Selected Countries, by
Thomas Lum; and U.S. Department of State.
While U.S. officials have pledged to support Nepal’s efforts to combat the
Maoist insurgency and to strengthen democracy there, they also have dismissed any
speculation that the United States seeks to establish military bases in Nepal. Given
an expressed U.S. interest in maintaining and improving relations with India, some

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have argued that the United States should limit any military presence in Nepal that
might rile New Delhi.95 Continuing a military exchange program that was
established in the mid-1990s, a platoon-sized team of U.S. Pacific Command forces
reportedly engaged in month-long joint military exercises in Nepal in early 2003.
The exercise was meant to improve force interoperability and to boost Nepal’s
tactical efficiency.96 In May, the U.S. Ambassador to Kathmandu was quoted as
saying that the United States “does not seek to establish any U.S. base in Nepal and
the United States does not have any strategic interest in Nepal,” adding that the U.S.
military is there “just to train the Nepali soldiers in anti-terrorist techniques.”97 The
Maoists have expressed their opposition to any United States military presence in the
country and have stated they will fight U.S. military forces if they enter Nepal.98 In
a bilateral purchase deal unrelated to promised U.S. security assistance, a
consignment of 5,000 U.S.-made M-16 rifles was delivered to Nepal in January and
February 2003. These weapons were expected to be combined with a scheduled
shipment from Belgium of 5,500 advanced automatic rifles to enhance significantly
Kathmandu’s anti-insurgency capabilities.99
Terrorism
In September 2002, President Bush sent a letter to then-Prime Minister Deuba
thanking Nepal for its contributions to ending terrorism.100 The U.S. State
Department has listed the Communist Party of Nepal (Maoist) as an Other Terrorist
Organization.101 No links have been found between the Nepali Maoists and
international terrorist organizations operating beyond South Asia, such as Al Qaeda,
and the Maoist fighters have no known state patrons providing arms or supplies.102
Some 200 Nepali police and Royal Nepal Army officers have received anti-terror
training under an anti terror training agreement between the United States and Nepal.
95 “US Official Reiterates His Country’s Support,” BBC Monitoring South Asia, September
6, 2002; “USA Establishes Military Funding to Help Nepal Combat Maoist Insurgency,”
BBC Monitoring South Asia, September 11, 2002.
96 Surendra Phuyal, “US Forces in Nepal for Joint Military Exercise,” Kathmandu Post,
January 14, 2003.
97 “US Envoy Says No Plan to Establish Military Bases in Nepal,” BBC Monitoring South
Asia, May 6, 2003.
98 Chitra Tiwari, Nepal Maoists Agree to Bargain,” The Washington Times, August 2, 2003.
99 Surendra Phuyal, “US Arms Arrive, Wait On for Belgian Minimis,” Kathmandu Post,
January 6, 2002; Sushil Sharma, “Nepal Takes Delivery of US Rifles,” BBC News, January
6, 2003.
100 “Bush Thanks Nepal for Efforts Against Terrorism,” BBC Monitoring South Asia,
September 18, 2002.
101 U.S. Department of State, Country Report on Terrorism 2004, April 2005.
102 “US Official Reiterates His Country’s Support,” BBC Monitoring South Asia, September
6, 2002.

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This agreement has been targeted by the Maoists in their negotiations with the Nepali
government.103
Human Rights Concerns
The United States views Kathmandu’s record on human rights as “poor” due to
“numerous serious abuses” including “arbitrary and unlawful lethal force ... abuse of
detainees” and the use of “torture as punishment or to extract confessions.” The State
Department has also pointed to the disappearance of persons in custody and poor
prison conditions as other problems.104 Freedom of assembly, speech, and the press,
mandated by the Nepali constitution, have been suppressed by the government under
the current state of emergency. Reports by Amnesty International have echoed these
criticisms, asserting that Nepal has been “in the grip of a human rights crisis for a
number of years.” Amnesty International has also stated that as a result of the
February 2005 state of emergency “a human rights catastrophe is looming amidst
heightened militarization and an attack on democracy.”105
Along with the U.S. Department of State, Amnesty International, and Human
Rights Watch also have criticized the Maoist insurgents for human rights violations
in their ongoing conflict. The Maoists allegedly have committed murders, bombings,
torture, abductions, and the severing of victims’ limbs. Although they continue to
target the police and the army, the Maoists have also killed and injured civilians,
including political leaders, local elites, and suspected informers. Reports indicate
that the Maoists recruit children as young as 14 years old as soldiers, messengers, and
human shields. According to a July 2002 report prepared by a coalition of
international and Nepali human rights groups, at least 30% of the Maoist guerrillas
are children.106
Human trafficking and child labor are serious social problems in Nepal. An
estimated 5,000-12,000 Nepali women and girls are lured or abducted to India and
forced into prostitution each year. In addition, reports indicate that 2.6 million
children in Nepal, mostly girls, are economically active, with 1.7 million of these
children working full-time. Most child laborers — about 95% — work in
agriculture, and roughly 40% do not attend school. Until 1994, children reportedly
constituted nearly one-third of the workforce in Nepal’s carpet industry. However,
due to heightened media attention in consumer nations, the establishment of a
certification system for carpets made without child labor, and increased efforts by the
Ministry of Labor, children reportedly now comprise only 2% of Nepal’s carpet
103 “US Embassy Clarifies Anti-Terror Cooperation with Nepal.” BBC Monitoring South
Asia, August 16, 2003.
104 “Nepal: Country Report on Human Rights Practices-2004,” Released by the Bureau of
Democracy, Human Rights, and Labor, U.S. State Department, February 28, 2005.
105 “Nepal: A Long Ignored Human Rights Crisis is Now on the Brink of Catastrophe,”
Amnesty International, February 18, 2005.
106 “30 Percent of Nepalese Maoist Fighters Are Children: Study,” Agence France-Presse,
July 6, 2002.

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workers.107 In August 2002, the International Labor Organization and the Finance
Ministry of Nepal reached agreement on a $5 million project funded by the U.S.
Department of Labor to combat the worst forms of child labor in Nepal.108
107 Amnesty International, Annual Report 2001: Nepal, and Annual Report 2002: Nepal;
U.S. Department of State, Country Reports on Human Rights: Nepal 2001, March 4, 2002.
108 “Agreement to Combat Child Labor,” Press Releases, American Embassy, Kathmandu,
August 20, 2002.

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Figure 1. Map of Nepal

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