Nepal economy hits 20-year low

The Maoist insurgency has been keeping tourists away

Nepal's economy has shrunk for the first time in almost two decades as a bloody Maoist rebellion hits trade and manufacturing.

Figures released by Nepal's Central Bureau of Statistics show that the economy contracted by 0.63% in the 12 months to July 2002.

The insurgency has definitely hit the growth rate

Central Bureau of Statistics

Nepal's war with the rebels has left more than 7,000 people dead since 1996, the authorities say.

The violence has escalated since the army was deployed a year ago, forcing many industries to shut down and discouraging foreign visitors.

"The lack of security and political instability, resulting in indecision, have hit the economy," Rajendra Khetan, of the Federation of the Nepalese Chamber of Commerce, told Reuters.

A decline in key exports such as ready-made garments, woollen carpets and pashmina shawls has also contributed to the decline.

Foreign aid

Agriculture was the only key sector to record a positive growth rate - of 2% - but this did not compensate for the falls in manufacturing and trade.

Kathmandu has seen a series of protests

Trade, including tourism, fell by 11% and manufacturing output by 10%.

The authorities say that an improvement in the security situation would help put the economy back on track.

But some analysts say that the government will need a substantial increase in foreign aid to revive the subsistence economy.

For now, however, peace remains the biggest challenge.

Last week the Maoists appeared to renew an offer to hold peace talks and to stop attacks on government and political targets.

But since the offer, the authorities have blamed two attacks on police posts and a bomb blast on a bus in eastern Nepal on the rebels.