COVID-19 sledgehammers economic activities

We will have to wait for at least three to four months just to return to some semblance of normalcy

  • Pashupati Murarka, former president of FNCCI

The government needs to launch an effective rescue package that can provide relief to sectors across the board

  • Chandan Sapkota, economist

Kathmandu, April 8

This is the time of the year when Agriculture Inputs Company Limited moves into high gear to stock up on chemical fertilisers to avert shortage during the country’s biggest crop season, which begins in May-end.

Nepal consumes around 50 per cent of all fertilisers during the summer crop season. But since it does not produce the fertiliser, state-owned AICL generally tries to rope in contractors in April to import the input crucial to boost yields.

AICL, which caters to 70 per cent of domestic fertiliser demand, was all set to seal deals with four private parties between March 26 and April 17 to import one lakh tonnes of urea, a fertiliser widely used in Nepal. But the parties declined to sign the documents in the wake of uncertainty created by the global coronavirus crisis.

“They did not want to make any commitment, as they feared they would lose their security deposit in case they failed to deliver the consignments on time,” said the company’s General Manager Netra Bhandari. “This is troubling because our existing stock will last only till mid-June.”

If farmers do not get the input on time, agricultural output can dip by 20 to 25 per cent, according to Bhairav Raj Kaini, former director general of Department of Agriculture.

A drop in agricultural yield, especially paddy, will hit Nepal’s gross domestic product in the next fiscal year as well, as it accounts for more than a fourth of the country’s total economic output.

Nepal’s economy expanded by 7.1 per cent last fiscal year.

The government had estimated GDP to grow 8.5 per cent this fiscal year. But as COV- ID-19 crisis has sledge hammered economic activities, the Asian Development Bank has projected Nepal’s GDP growth to moderate anywhere between 4.3 per cent and 5.3 per cent in the current fiscal.

It will have a huge impact on the livelihood of daily wagers and informal workers if the situation persists for a much longer period, said the ADB’s latest Macroeconomic Update released last week.

Over the years, the share of informal sector in job creation has dropped to 62 per cent. Yet informal employment still hovers at around 84 per cent, meaning many of those employed in the formal sector are not entitled to paid annual or sick leave and are not covered by social security. These people are likely to suffer if they lose jobs or are asked to take unpaid leave.

Nepal has already seen income of mobile vegetable and fruit vendors, street hawkers, porters and construction workers plummet since the lockdown began on March 24 to contain the spread of coronavirus disease, which, so far, has infected nine. Many working in hotels, restaurants, and travel and trekking agencies also fear job losses or a cut in their salaries. Even bigger enterprises are considering laying off workers on the assumption that the crisis will prolong due to voluntary restriction in movement, which will reduce demand for goods and services.

Will hardships faced by vulnerable groups push people back into poverty trap? It is not yet known. But a World Bank study conducted during 2015 earthquakes showed that a large proportion of Nepali households were just a sickness, a bad monsoon or a natural disaster away from slipping back into poverty, as they were living on the edge of the poverty line.

Nepal has made impressive improvement in poverty reduction over the decades, with poverty headcount rate dropping from 42 per cent in 1995 to 21.6 per cent in 2015. The rate, according to government estimates, further fell to 18.7 per cent in 2017-18, thanks to massive inflow of remittance.

Dependence on remittance is pervasive in Nepal with at least 56 per cent of households receiving money from Nepalis working abroad. This money, on average, accounts for 31 per cent of gross income of these households, as per Nepal Living Standard Survey 2010-11.

The coronavirus crisis has now threatened to eat into this steady income source, as Delhi- to Dubai-based firms are gradually sending Nepali workers, especially those employed in service sector, on unpaid leave or are laying them off.

“We have heard news of layoffs and unpaid leaves. But most of the firms in the Gulf and Malaysia, where a big chunk of Nepalis are employed, have not taken such measures for humanitarian reasons. This, however, does not mean there will be no layoffs going forward,” said Kumar Prasad Dahal, director general of the Department of Foreign Employment, adding, “Massive job cuts abroad are inevitable considering the damage the coronavirus crisis has caused to economies.”

This is not a good sign for Nepal that receives around $8 billion in remittances per year, which, as a share, is around a fourth of GDP. A sharp drop in remittance inflow would not only reduce household spending and erode living standard, but also trigger a liquidity crisis.

“If remittance inflow shrinks by even a fourth, banks will be in a lot of trouble, as deposit collection and credit disbursement will suffer,” said Bhuvan Dahal, CEO of Sanima Bank. A fall in remittance income coupled with a cutback in exports revenue, tourism income and foreign direct investment will make a big hole in foreign exchange reserves, as the import-dependent country will not stop bringing in goods and raw materials from abroad even during crisis. This will compel the government to run a huge fiscal deficit as it will have to meet crucial expenditure commitments amidst a steep revenue shortfall.

“The economic fallout from this crisis will be very severe.

What is even more frightening is that there is no certainty when it’ll end,” said Pashupati Murarka, former president of the Federation of Nepalese Chambers of Commerce and Industry.

“The country is locked down (till April 15), but even after we open up we might have to shut everything down if coronavirus cases rise. I think we will have to wait for at least three to four months just to return to some semblance of normalcy.”

The level of uncertainty sparked by the coronavirus pandemic has been unprecedented.

The size of uncertainty during this pandemic is three times bigger than that of 2002-03 SARS epidemic and about 20 times bigger than that of the Ebola outbreak, according to the International Monetary Fund.

“At times of pandemics, the first priority of the government should be to save lives,” said Murarka. “But it should also think of ways to spur demand to save the economy.”

The unique aspect of the latest economic crisis is that it was not triggered by demand shock but by rapid fall in supply.

Production across the globe has dropped or come to a complete halt not because of a slump in demand but because of rapid closure of production units. This has disrupted supply chains and rendered many jobless. This has subsequently forced consumers to tighten their purse strings, triggering a demand shock.

This drop in demand may encourage suppliers to further cut back on production leading to more job cuts.

“This is a vicious cycle and is taking the shape of a supply-demand doom loop. This can disrupt economic activities, preventing the economy from reaching its full potential,” said economist Chandan Sapkota. “The country can come out of this precarious macroeconomic situation only if the government launches an effective rescue package that can provide relief to sectors across the board.”

Nepal did launch a COV- ID-19 relief package a few weeks ago. The private sector has welcomed the government initiative, but called it “insufficient”.

A version of this article appears in e-paper on April 09, 2020 of The Himalayan Times.