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

Highlights of World Bank’s South Asia Economic Update 

  • Nepal’s GDP growth projected to moderate to 1.5-2.8 per cent in the current fiscal year

  • GDP growth to range between 1.4-2.9 per cent in FY 2020-21 and between 2.7-3.6 per cent in FY 2021-22

  • Labor-intensive services sectors to be hard hit

  • For every US$1 million of foregone demand in labour-intensive services sectors in Nepal, at least 250 employment opportunities may be lost

  • Remittances to fall because of global crisis and fall in oil prices

  • 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

  • Measures to raise demand will not increase supply in the short run, because production facilities are closed to mitigate the spread of the virus

  • India’s COVID-19 containment and economic recovery plans to affect entire South Asia

KATHMANDU: The World Bank has made sharp adjustments to Nepal’s economic outlook in the wake of the coronavirus crisis, downgrading gross domestic product (GDP) growth estimate to a range of 1.5 per cent and 2.8 per cent for the current fiscal year. These projections -- the lowest since the devastating 2015 earthquakes -- are way below the government’s growth target of 8.5 per cent for this fiscal year 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 fiscal years, as the Washington, DC-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 year and 2.7 per cent and 3.6 per cent in Fiscal Year 2021-22.

Nepal was stuck in low-growth trap of around four per cent per annum, on average, for 45 years. It had managed to recover from the subpar economic growth after the 2015 earthquakes; and since 2016-2017 it has been clocking average growth rate of 7.3 per cent per annum. The crisis triggered by coronavirus pandemic has now threatened to erode these gains and put the economy back into a state as bad as before.

“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 other western countries but it is 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 has forced countries, including Nepal, to take harsh measures to contain the spread of the deadly disease, which has killed close to 100,000 worldwide and infected over 1.6 million. Nepal has detected only nine cases of COVID-19 so far, yet it has locked itself down since March 24 considering the fragile healthcare system. This measure taken by the government has been widely supported by the public but it has also 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 that is in effect for two to four months could cut manufacturing and services production by half during that period, says the WB’s South Asia Economic Update titled, ‘Impact of COVID-19 on the Region’s People and Economies’, launched on Sunday.

Although this unprecedented crisis will badly affect all sectors of the economy, one area that will receive the severest blow is services, especially labor-intensive services sectors, where workers earn less, have fewer years of schooling and are more likely to be self-employed or unpaid. Some of the major labor-intensive services 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 World Bank 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 2007-08 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 a relief to countries in the Gulf where large numbers of Nepalis are employed.

But the situation is different this time, as the crisis is truly global in nature and oil prices have halved to around US$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 latest slump in oil prices coupled with disruptions of payment systems could reduce remittances, aggravating the problem of many countries in South Asia that rely on remittance inflows, says the WB report. This could lead to a massive inflow of overseas migrant workers in the coming months, exacerbating the unemployment problem in Nepal.

These projections show that the COVID-19 crisis will come with dire economic consequences. Even more worrisome is the impact on the poorest. A poor person is highly likely to have lost a job and domestic migrant workers, who had escaped rural poverty by finding work in cities, may have been forced back into rural poverty again. What’s more, 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.

Many in Nepal are now calling for gradual lifting of lockdown to create an environment for people to return back to work as the country is not badly affected by the global pandemic. If that advice is followed, economic growth may quickly recover in the next fiscal year. But others are saying Nepal should not take a decision in haste as there is no guarantee that cases will not rise here.

This conundrum has put policymakers 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 jumpstart the economy, once countries emerge out of the immediate health crisis,” says 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.”

But sound domestic policies may not only help Nepal overcome the crisis, as external factors, such as problems in global supply chain, and most importantly policies that India decides to pursue to both control the health crisis and revive the macroeconomy post-COVID will be crucial, adds the WB report. A one percentage point increase in India’s per-capita GDP growth is associated with a 0.49 percentage point increase in the rest of South Asia, adds the report.