Nepal | June 04, 2020

Nepal’s GDP growth to slump to as low as 1.5pc: WB

Rupak D Sharma
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Kathmandu, April 12

The World Bank has made sharp adjustments to Nepal’s economic outlook in the wake of the coronavirus crisis, downgrading gross domestic product growth estimate between 1.5 per cent and 2.8 per cent for the current fiscal year. These projections — the lowest since the impact of the devastating 2015 earthquakes were felt — are way below the government’s growth target of 8.5 per cent for this fiscal and WB’s own pre-COVID-19 forecast of 6.4 per cent.

What is even more worrisome is that the economy is unlikely to bounce back strongly in the next two fiscals, as the US-based multilateral lender has projected Nepal’s GDP growth to hover between 1.4 per cent and 2.9 per cent in the next fiscal and between 2.7 per cent and 3.6 per cent in fiscal 2021-22.

“We all know that COVID-19 will hit South Asia (including Nepal) very hard (economically). The official numbers of infections seem to be low in the region compared to western countries but they are growing faster. So the worst may be yet to come,” WB Vice-president for South Asia Hartwig Schafer told selected South Asian journalists via conference call.

COVID-19 threat has prompted Nepal to lock itself down since March 24 to contain the spread of the disease. The government’s measure has gained widespread support  considering the country’s fragile healthcare system, but it has come at a huge economic cost as it has led to closure of almost everything, rendered many jobless and raised the prospect of many falling back into the poverty trap.

A lockdown of two to four months could cut manufacturing and service sector output by half during that period, states the WB’s South Asia Economic Update launched today.

Although this unprecedented crisis will badly affect all sectors of the economy, one area that will receive the severest blow is services, especially labour-intensive service sectors, where workers earn less, have fewer years of schooling and are more likely to be self-employed or unpaid. Some of the major labour-intensive service sectors are: retail trade, which includes mom-and-pop and apparel stores; land transportation; personal services, which include motorcycle workshops and beauty parlours; and accommodations, such as hotels, and restaurants. For every US$1 million of foregone demand in these sectors in Nepal, at least 250 employment opportunities may be lost, according to WB estimates.

This crisis will affect manufacturing sector too. But the magnitude of possible harm would be less severe because goods can be stored for future use and production can be ramped up to original levels faster if there is a jump in demand. Service related products, on the other hand, cannot be stored and require interaction among people to be consumed, says the WB report.

This implies a significant share of the demand for entertainment, dining out and personal services  that is lost during the crisis may never return, resulting in permanent job losses for many workers and day labourers.

In economic crises, depressed demand can be stimulated by floating stimulus packages. But this crisis was caused by supply constraints, not merely lack of effective demand, says the WB report. “This means increasing effective demand via macroeconomic stimulus will not bring back jobs in the short run for restaurant employees or taxi drivers.” In other words, measures to raise demand will not increase supply in the short run, because production facilities are closed to mitigate the spread of the virus.

But even after removal of supply constraints, demand is unlikely to rebound to that of normal times soon because of the possibility of sharp reduction in remittance inflow, which has long remained a steady source of income for many Nepalis.

“Normally remittances are countercyclical, meaning migrants tend to send more money home to support their families in case of a crisis back home,” said Hans Timmer, chief WB economist for South Asia. Even during the global financial crisis of 200708 Nepal recorded over 40 per cent jump in remittance inflow. This was largely because oil prices, which had initially taken a hit, quickly recovered to US$70 per barrel, providing relief to countries in the Gulf where large number of Nepalis are employed.

But the situation is different this time, as oil prices have halved to around $30 per barrel since the beginning of the year, “suggesting that oil-related activities may shut down”. A US$1 drop in the price of oil is associated with a 0.28 percentage point drop in total remittance inflows to South Asia over the last 10 years, according to the World Bank.

The slump in oil prices coupled with disruptions of payment systems could reduce remittances, aggravating the problem of many countries in South Asia, states the WB report. This could compel overseas migrant workers to return to Nepal in droves in the coming months, exacerbating the unemployment problem here.

These projections show that the COVID-19 crisis will come with dire economic consequences. Even more worrisome is the impact on the poorest. For example, agricultural producers, many of whom are poor, may see a decline in incomes as the breakdown in distribution systems forces them to accumulate inventories. Many of the poorest may face higher risk of food insecurity as well.

This conundrum has put policy-makers in an unchartered territory, which, according to the World Bank, calls for “innovative policies”.

“In their immediate response, the focus has been rightly on mitigating the spread of COVID-19. While doing that, conditions should be created to jump-start the economy, once countries emerge out of the immediate health crisis,” states the WB report, adding, “If many small and medium enterprises do not survive the crisis and migrant workers cannot return to their original jobs, the recovery could take even longer.”

A version of this article appears in e-paper on April 13, 2020 of The Himalayan Times.

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