Covid-19 Pandemic: Impact on Economic health and Quick initiatives for Government Of Nepal

Prakriti GC, Rohan Byanjankar
May 27, 2020

Nepal is economically struggling sovereign state. A decade long conflict, political upheavals, premature de-industrialization, low FDI inflows, and consumption-oriented remittance are some of the factors that have stunted the economic growth of Nepal. The average growth rate of Nepal between 2001/02 and 2018/19 is 4.37 percent. Nepal experienced a GDP growth rate of less than 1 percent during 2001/02 and 2015/16. Such a low growth rate was due to unanticipated shocks in the form of September 11 attack and Royal massacre, and April 2015 Nepal Earthquake, respectively. Likewise, in recent times, the unexpected socio-economic shock brought about by COVID-19 is likely to plummet the GDP growth rate to 2 percent or less.

Macroeconomic indicators are the summary statistics that reflect the economic health of a country or a region as a whole.

Nepal considers 18 economic indicators that capture the overall economic health of the economy.

Some of the major macroeconomics indicators are Real Gross Domestic Product (GDP), Nominal GDP, Gross National Income at current price, Gross National Disposable Income, National Consumer Price Index (CPI), National Wholesale Price Index, Broad Money Supply (M2), Domestic credit, foreign trade, Government Revenue, and Government expenditure. The major economic indicators provide a bird’s eye view over the economic health of the country. The COVID-19 pandemic is likely to have a drastic impact on these macroeconomic indicators.

World Bank (2020) predicts that the economic growth of Nepal hovers between 1.5 percent and 2.8 percent, while IMF (2020)estimates that Nepal’s economy in FY 2019/20 grows at 2.5 percent. Moreover, CBS (2020) has estimated the GDP growth rate of 2.28 percent with an assumption of resuming economic activity after Baisakha 25, 2077 except for Hotels, restaurants, and airline sectors. But the scenario has changed as the government has extended the lockdown. Thus, the GDP growth rate is further expected to decline.The estimates by both the World Bank and the IMF are far lower than the targeted growth rate of 8.5 percent by the Government of Nepal. Likewise, with more than 6 million Nepalese working abroad, Nepal receives a huge inflow of remittance. Remittance inflows stand at Rs. 879.27 billion in FY 2018/19 and remittance to GDP ratio hovers around 25 percent (Nepal Rastra Bank, 2019). World Bank (2020) has estimated a decrease in remittance inflow in Nepal by 14 percent in FY2019/20.

Data: CBS, Nepal

COVID-19 has severely affected the world economy resulting in mass unemployment. Hence, remittance inflow in FY 2019/20 is expected to fall in the last quarter and subsequent years. However, the shock due to the fall in remittance is lessened if it is accompanied by a fall in imports. Conversely, devaluating Nepalese rupees in comparison to the US dollar exerts pressure on maintaining the trade deficit.Likewise, remittance drives consumption as 79 percent of the total remittance is consumed (NLSS III, 2010/11). Moreover, 58.2 percent of rural households receive remittance; hence, the fall in remittance inflow affects rural households. With the majority of poor people reside in rural areas, rural poverty is likely to rise.

Accordingly, the government has missed its revenue collection target as of mid-April by 198 billion as a result of complications arising due to the COVID-19 epidemic.

The lockdown and the subsequent disturbances in sectors such as construction, manufacturing, hotels and restaurants, transportation, and wholesale and retail trade have resulted in the estimated loss of Rs. 2 billion to the economy.

The COVID-19 pandemic has severely disrupted the global supply chain. The imposition of lockdown in China and India has affected the foreign trade of Nepal as India and China are the major trade partner of Nepal. China accounts for about 8 percent of Nepal’s construction materials. Also, China has supported many projects, including Narayangarh-Butwal, Rasuwa-Safarubesi Road, Pokhara, Lumbini Airport, and hydro-power projects. The shortage of construction materials and the unavailability of foreign stakeholders have impinged the construction sector.On the other hand, the banking and financial sector is also under pressure. The business houses and other small enterprises have experienced difficulty in payment of interest and loan. The overall domestic credit flow is expected to decline in the last quarter of FY2019/20, and the subsequent years. The low remittance inflow is also likely to affect the Nepalese banking sector. However, the demand for loanable funds is low, so BFIs are likely not to experience liquidity crunch and credit crunch.

The Asian Development Bank (ADB) had earlier said that the overall GDP could decline by Rs. 1.5 billion(5.5 percent) as per the normalized projection. This earlier projection may not be consistent with the three-phase launch of the ADB. Things are different now. Even if we launch now, tomorrow may not be the same.The government of Nepal shall take some important steps aimed towards safeguarding citizen’s health, maintaining a tracking mechanism, and quick disbursement of relief packages. The government shall focus on effectively combating COVID-19 pandemic and reallocation of resources is utmost as the government is currently under pressure to manage funds. The MoF decision to halt budget spending under 14 different headings such as vehicles, machinery equipment, and the like is appreciable. COVID-19 epidemic is a worldwide health pandemic and such a massive health pandemic can bring disaster in countries with poor health facilities such as Nepal.

The government of Nepal shall focus on utilizing Rapid Disbursement Emergency Financing created by the World Bank Group. Likewise, the fund raised in SAARC COVID-19 Emergency Fund shall be channelized towards the health sector without further delay.Likewise, the IMF has allocated $ 3 billion in ‘Rapid Disbursement Emergency Financing’.The government of Nepal must take quick initiatives and direct unutilized funds towards the subdue of COVID-19.

The mounting pressure on the health sector calls for prompt action against the spread of coronavirus, quick disbursement of medical equipment, and proper management of quarantine spots.

The global economy is hit hard by the COVID-19 pandemic. Nepal is no exception from an economic disaster brought about by this epidemic. The global economic activities are expected to shrink by 3 percent, while Nepal is expected to achieve a meager growth of 2 percent or less. The remittance-based economy of Nepal is likely to be hit hard by COVID-19.Every component of the macroeconomic indicator is expected to divert from its normal trend in FY2019/20 and the subsequent year. However, Nepal must learn a lesson from the COVID-19 pandemic. Remittance can never be the source of permanent prosperity. The COVID-19 has evinced the risk of dependency on remittance.Now, it is time to restore economic independence. The proper management of those returning from foreign employment poses a challenge, but Nepal must accept and get through this harrowing ordeal. Thus, we must turn every stumbling blocks into stepping stone by adopting appropriate policies along with proper management of economic and human resources.

Rohan Byanjankar, Assistant, Nepal Rastra Bank, Research Department

Prakriti G.C, Researcher, Institute of Foreign Affairs