Nepal | May 27, 2020

Reviving economy amidst COVID-19

Rewat Bahadur Karki
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The COVID-19 infection and thereby the lockdown has been paralysing the whole world, including Nepal. This epidemic is different from other crises like an earthquake, economic blockade or depression, where there is no lockdown of people, the mobiliser of the world, including the economy. Along with the multi-sectoral impact, the volume and depth of its effect are still unknown. Moreover, the accessibility open to the southern border, followed by a weak economic, health and digitalisation capacity, has further put Nepal at high risk.

Before the outbreak of COVID-19,  a 4.5 per cent first-quarter growth estimate was made by the Central Bureau of Statistics (CBS) for this fiscal year, against the ambitious government annual target of 8-5 per cent, mainly due to slackened economic activities caused by a shortfall in paddy production, slow industrial production and lowest expenditure of 25 per cent of the capital budget during this period. However, the last three years had registered high windfall growths of more than 6 per cent primarily because the problems of load-shedding and general strikes had been resolved, and the monsoon had been most favourable.

The COVID lockdown has further hit the slackened economy and the general people. The economy is almost locked, and the general public, especially the poor people, are suffering heavily. Its effect on the economy will largely depend on the success of COVID control and how the economy and general people’s grievances are addressed by the government. The management of this situation so far has been pitiable.

The lockdown has seriously affected all four sectors – real sector, fiscal, financial and external.  The real sector, the most important one, which measures income/production, investment, livelihood, employment, poverty and inflation, is being badly affected. Among the 15 sub-sectors in both agro and non-agricultural sectors, only some subsectors like electricity, gas, water, communication, wholesale and retail trade are in operation to some extent, leading to about 10 per cent operation of the economy.

As an estimated 90 per cent of the economy has been closed down, daily GDP loss amounts to around Rs 9.5 billion. So a 45-day lockdown has meant a loss of Rs 428 billion based on this year’s CBS GDP estimates of Rs 3,767 billion. Although some services have opened after 45 days, the situation has not improved.

Slackness in economic activities even before the COVID outbreak and almost shutdown of the economy after its outbreak has led to this fiscal year’s growth to around 2 per cent as per CBS estimates and almost similar estimates by the International Monetary Fund. As the government so far does not seem serious about addressing these economic issues, the dismal performance of the remaining two months may even lead to negative growth.

As a result of the lockdown and low economic activities, thousands of Nepalis have lost or are losing their jobs both in the domestic and foreign labour market. This will lead to doubling of the 12 per cent unemployment rate (as per 2017/18 Labour Force Survey) and the below poverty level, which had risen by 2 percentage points due to the last earthquake, will shoot up. Similarly, inflation will jump to two digits from 7 per cent in mid-February 2020, resulting from low production, supply constraint and black marketing.

The guiding sector of the economy – fiscal – seems to record a discouraging performance. If some unintended items of current expenditure are not curtailed, despite the low capital expenditure, the budgeted current expenditure, which will not decline, will result in a high budgetary deficit exceeding 5 per cent of GDP due to a high shortfall of slackened revenue performance, with only one-third revenue collection of the current year’s budgeted Rs.1,112 billion in the tri-semester.

The financial sector, which mobilises the economy, will also be adversely affected, leading to financial stability threats due to shortfall in investments and deposits, repayment problem and high non-performing loans in the banking sector. Other affected areas include the capital market, insurance and cooperatives. The external sector also will face a serious threat in addressing the overall balance of payments (BOP) as a result of the large shortfall in foreign remittance, further slackened export performance, low foreign investment and bilateral aid coming from the affected countries, despite some inflow of multilateral aid in the form of relief packages.

Like our economy, all the countries – developed and developing – are also bearing such a threat. While addressing the threat or effect, different countries have adopted complete lockdown, partial lockdown and no lockdown policies, and introduced several relief and stimulus packages for the affected people and the economy. Without a lockdown, South Korea and Singapore are succeeding in controlling COVID and putting the economy on track by introducing other measures, whereas New Zealand locked the people but not the economy, and got success in controlling the epidemic and putting the economy on track.

Although many European and other countries, including India and South Africa, adopted a lockdown policy, a series of relief and stimulus packages have been announced to reduce the adverse impact on the economy and provide relief to the general people. However, China has been successful in controlling COVID infection and put the economy on track by introducing a lockdown policy only in the affected areas.

In Nepal, a lockdown policy was adopted on time, but in the name of a relief package, the government issued an order to the respective sectors, including local and provincial authorities, to provide relief to the affected persons and sectors, which is ridiculous. The lockdown’s management itself is very poor and ineffective. This has made the life of the people returning home miserable and pitiable. On the other hand, farmers are bound to bear a huge loss of perishable products like fruits and vegetables, milk, poultry and meat due to lack of market access in addition to the problem of harvesting and planting crops.

So far, the government has not announced any relief or stimulus package, instead, it is waiting for the regular budget to do this. The forthcoming budget will be based on the ruling party’s election manifesto and socialism principles as recently presented by the finance minister in the forthcoming budget principles and priorities. As COVID control and its full effect on the economy are still uncertain, the annual budget alone is not sufficient. Such a package should be announced as per the timely need and situation. The affected needy people and economic sectors need such a package immediately and can’t wait any further. If the government does not address these issues properly and in time, Nepal will fall into an insolvable great crisis.

In this context, the government should focus on balancing COVID control and reducing its adverse effect on the people and the economy. On the other hand, there is a strong need for a relief and stimulus package to provide relief to the affected people and activate the economy. In this connection, here are some practical sectoral suggestions.

Real sector: A separate strategy should be developed to facilitate people’s livelihood, and GDP and investment growth, address the unemployment and poverty issues and also limit the hyperinflation. For this:

– provide cash/kind relief to the affected low-income group for at least another two months and a stimulus package to the affected  micro/SMEs  sectors,

– facilitate the farmers with some subsidy for transportation of agro products, and harvesting as well as the planting  of crops,

– facilitate to activate the informal sector – which accounts for  62 per cent of employment in Nepal

– grasp the opportunity to employ unemployed domestic and foreign returned youths for development, and

-prioritise health, digital and agricultural sector, including irrigation, with a special package.

Fiscal sector: This should focus on limiting the budget deficit within 5 per cent of GDP by curtailing the unintended regular expenditure, expediting important capital expenditure and also mobilising revenue and multilateral aid for the relief program. For this:

– announce immediately a reform/stimulus programme as mentioned in these four sectors and include this programme and adopt sectoral strategies in the  forthcoming  budget,

– curtail unintended regular expenditure, parliamentary development fund and less important capital expenditure to divert the fund for relief programme,

– rebate tax and tax holiday to all affected sectors, and

– announce a stringent economic policy for the public, private and social sectors.

Banking/financial sector: Focus of this sector should be on financial stability, reducing the likely possibility of a financial crisis and non-performing loans, encouraging investment and resolving repayment problem. For this:

– enhance fund by not allowing this year’s profit distribution of BFIs, and review the recently announced regulation on providing facilities to BFIs,

– special NRB relief package for micro and SMEs, including interest subsidy,

– 25 per cent tax rebate on BFI profit of this year and encourage the running of the securities market, insurance and cooperatives.

External sector: In this situation, this challenging sector should focus on making a favourable BOP by encouraging export package, curtailing luxurious imports and sincere effort to mobilise multilateral aid for relief and stimulus programmes. Other  areas would be  to:

– announce an attractive export package for  cottage and small industrial products and encouraging high standard foreign tourist package,

– send trained manpower to COVID-free countries,

– provide special facility to select import-substitute industries and agricultural products and

– emphasise on production and export of hydropower by reducing cost.

If the special relief or stimulus programme is not announced and executed, it will threaten the livelihood of the people, and the slackened economy will fall into a big economic crisis.


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