A gradual recovery is underway in Nepal, boosted by the lifting of containment measures as vaccination picks up and tourism and migrant worker flow recover. The economy is expected to grow by 3.9 per cent in fiscal year 2021-22, an improvement over 1.8 per cent growth in fiscal year 2020- 21, but still below pre-pandemic growth averages, according to World Bank's latest South Asia Economic Focus.

In South Asia, recovery continues as global demand rebounded and targeted containment measures helped minimise the economic impacts of the recent waves of COVID-19. But the recovery remains fragile and uneven, and most countries are far from pre-pandemic trend levels, states the World Bank's twice-yearly regional update.

In Nepal, recovery is vulnerable to risks, and will rely on the continued gradual resumption of economic activities alongside social distancing and an effective vaccination rollout this year.

The latest South Asia Economic Focus titled 'Shifting Gears: Digitisation and Services-Led Development' projects the region to grow by 7.1 per cent in 2021 and 2022. While the year-on-year growth remains strong in the region, albeit from a very low base in 2020, the recovery has been uneven across countries and sectors. South Asia's average annual growth is forecast to be 3.4 per cent over 2020-23, which is three percentage points less than it was in four years preceding pandemic.

"The pandemic provides opportunity for countries to craft recovery path that draws lessons from the crisis," stated Faris Hadad-Zervos, World Bank country director for Nepal, Maldives and Sri Lanka.

"Nepal recently adopted the Kathmandu Declaration as a joint commitment of government and development partners towards country's Green, Resilient, and Inclusive Development (GRID). Mobilising private sector through green investment and support for small and medium enterprises with job growth potential in the services sector is a key part of Nepal's GRID strategy."

COVID-19 has left longterm scars on the region's economy, the impacts of which can last well into the recovery.

Many countries experienced lower investment flows, disruptions in supply chains, and setbacks to human capital accumulation, as well as substantial increases in debt levels. The pandemic is estimated to have caused 48 to 59 million people to become or remain poor in 2021 in South Asia.

As countries build back, they have a chance to rethink their long-term development models. With the emergence of new digital technologies, South Asia has an opportunity to shift gears from a traditional manufacturing-led growth model and capitalize on the potential of its services sector.

The role of services in region's economy has been increasing amid rapid technological change and accelerated structural transformation of global economic activity in response to the pandemic. The adoption of digital technologies makes services more tradable, enables services to increase productivity of other sectors - including manufacturing - and creates new markets. Some South Asian countries are increasingly providing business and professional services that add value to manufacturing and play a key role in global value chains.

In Nepal, the pandemic has accelerated the growth of digital services, with the use of electronic payment transactions increasing by double digits.

Growth in the services sector as a whole is expected to drive Nepal's recovery, despite structural constraints such as slow domestic job creation, the country's high vulnerability to natural disasters and climate change, and large infrastructure gaps.

"Countries in South Asia have a strong comparative advantage in exporting services, particularly business processes and tourism, whereas they have struggled to break into manufacturing export markets," said Hans Timmer, World Bank chief economist for the South Asia Region. "To realise the potential of the services-led development, the region needs to rethink regulations and establish new institutions to support innovation and competitiveness."

A version of this article appears in the print on October 8, 2021, of The Himalayan Times.