COVID-19: Impact on Nepalese Economy vs Central Bank’s Response

Bama Dev Sigdel, Ph.D. -  September 22, 2020

Visiting Professor, Economics, People's Campus
Program Director, Centre for Policy Studies and Rural Development (CEPRUD), Nepal   e-mail: 

With the spread of COVID-19, almost all the economies around the world are being affected very badly. This has resulted to a very rapid deceleration in their targeted economic growth which they have predicted for the year 2020. Due to the current pandemic, it is said that the world’s annual economic growth may shrink and remain at 2.4 percent which was previously said to be increasing up to 3.0 percent during the year 2020.With the outbreak and spread of corona virus throughout the continents around the world, economic cost will rise from both the sides of demand and supply. The corresponding fall in income will generate demand shock in the form of fall in current expenditure. The transmission of disease has led the world in economic shock. Travel bans and lockdowns in most of the nations has disrupted the normal life by creating more suffering and chaos among people and one day after another adding more uncertainty about their future. High level of frustration and growing unemployment has been witnessed among the people, which are also leading most of the working class people to the verge of committing suicide. The rise in the income inequality among the people is also being seen due to the effect of COVID-19. It is expected that developing countries will be the ones which will be mostly affected because of this ongoing pandemic. The GDP growth per annum will also be decelerating by 1.5 percent, which will also result to the rapid drop in the trade stock by 0.7 percent in the year 2020.

World Bank has projected the post COVID-19 economic condition of South Asia. And the results showed that, South Asia’s developing economy stood at 1.3 percent to 2.8 percent in the least case scenario in 2020 from the previously estimated ratio of 4.7 percent in 2019. The decline in domestic demand, lower business and deadlock on tourism-travel, lower profit of trade and production linkage, supply disruptions, health effects could be witnessed in South Asian countries due to COVID-19. Transportation limitations as well as restrictions in South Asian region have further slowed economic activities among South Asian countries. Inter country trade is disturbed with the continuous lockdown adopted by South Asian countries. As lockdown come into force, working population of informal economy in South Asia are out of work; majority of them have returned to their respective native land in absence of jobs. South Asian countries may lose huge amount of remittance coming from abroad; this will further retard the movement of urban vs. rural economy and attribute on the growth of poverty and hunger. Majority of poor families of South Asia are hit hard by COVID-19, they could not afford skyrocketed medical bills as health facilities are getting more costly with the ongoing pandemic.

Government of Nepal had projected that Nepalese economy will grow by 7 percent by the year 2020. But due to the COVID-19 and its effects, the growth figures and cost has been revised and it has been concluded that the economy will grow by just 2.25 percent this year. Recently, The Central Bureau of Statistics (CBS), Nepal has hinted that Nepalese Economy may grow by negative trend if the lockdown prolongs further.  ADB had also forecasted soon after COVID-19 pandemic that Nepal’s economy will drop by – 0.463 percent (US $ 42.2 billion loss) in the worst-case scenario in 2020. Nepal may lose agriculture production, industrial output, and service sector’s contribution to generate GDP in 2020 and beyond, with less employment, food prone inflation, magnification of poverty in both rural as well as urban areas. Remittance inflow to Nepal from abroad may decelerate sharply (20 percent decrease by Nepal Rastra Bank) which will hit balance of payments and imports. COVID-19 spread in the Gulf and Asian countries may result to decrease in petroleum prices in their countries and closure of hotels, malls, and service sectors. It is expected that more Nepali youths may lose various jobs; thereby they intend to come back to Nepal. Management of oversupply of workable youths in Nepalese labour market will be daunting task to manage for Nepal in the years to come.

 Travel and tourism sector of the world (including Nepal) has been badly hit soon after the pandemic was declared by WHO. Nepal’s “Visit year 2020” was postponed. The government implemented the lockdown and soon after this they also put a halt on all the international and domestic flights due to the fear of the worst-case scenario and to make them prepared for the virus containment. This seriously affected the hotel businesses nearly 80% hotel bookings were withdrawn by probable tourist. Then the ban was put on the Chinese and Indian tourists with the effect of the sealed borders, lockdown, and fear of the disease itself. With the stoppage of granting visa for foreigners to visit Nepal effectively from mid-February, there has been further decline in the number of tourists visiting Nepal. Nepal has lost millions of dollars that it could earn from the tourism and travel sector. And in overall this affected the lives of more labours and personnel related to this business as they lost their jobs and earnings. Investment on this sector by Nepali investors is in danger currently. Most of the hotels and resorts are constructed with the loan taken from the banks and financial institutions. Investors are in crisis as well and are hardly in the state of repaying loans or payment of monthly interest to such financial institutions.

The effect of COVID-19 for majority of developed countries of the world remained severe. With this, these countries will not be in the position to provide economic assistance to the majority of developing as well as least developed countries including Nepal. Thus, aid commitment from bilateral donors to Nepal will be expected to be low for coming years. Nepal’s development work will further decline with the low flow of such external financial assistance. Nepal may face hardship to finance the programs designated by the government. Especially, poverty lessening along with social sector development programs targeted at rural areas by government will be retarded in coming years. Additionally, growing of foreign debt burden in Nepal will make more hardship and the country might fall under the debt trap. Low profile of internal revenue collection has urged Nepal to eye foreign aid or loan; this will be more severe in the years to come with the post COVID-19 effect. Debt waive to developing as well as least developed countries without any pre-condition from bilateral or multilateral agencies as World Bank, IMF, etc. will make easy on fiscal management effort.

Prioritized economic sub-sectors of Nepal which are to be revived are: agriculture followed by foreign employment, tourism, banking and insurance, construction, energy, hydropower; etc. The most affected sector is foreign employment and tourism. It is estimated that nearly 4 million Nepali youths are working abroad especially in the Gulf regions, Malaysia, and other parts of the world. 1 to 1.5 million Nepali workers wish to return Nepal for safety reasons and probably will not return abroad for least few years. Thus, Government of Nepal should come up with concrete Plans/Road Map for the engagement of such returnee labour forces. With the Government’s concrete expenditure program; surplus rural labour force could be used on the projects of national importance, river taming, construction of irrigation cannels, plantation of herbs, forest conservation, greening of cities, sewage/drainage construction and recycling, reclamation of land, extension of pasturing areas, construction of satellite /metro cities, construction of hydro-projects, etc. This will have multiplier effects on Nepalese economy with an additional growth and assurance of more employment opportunities. Additionally, youths of rural households could be involved in animal husbandry, poultry, beekeeping, food and fruit processing, sericulture, horticulture activities, etc. And this would also yield additional earning and employment in rural areas.

Revival of agriculture sector with more production is a must to cope with such pandemic. Through this, more nutritious food could be provided for survival of Nepali population within the reasonable price. With the bumper production of varieties of crops and vegetables; the export of rice, maize, wheat, millet, barley, pulses, fresh vegetables, etc. to neighbouring countries is possible. Through this, one can imagine of upgrading the livelihood of its entire farming families. Provision of concessional loans from banks and cooperatives to such farming families could support to take off agriculture sector. Additionally, government’s investment and support on the provision of basic infrastructure e.g., irrigation canals, roads, warehouse, electricity, etc., to the farming families could do a lot to have more agro-production, distribution, and trading of such produce.  Cooperative and family farming practices, which are extremely popular in rural areas, should be promoted further. Agricultural inputs as well as assurance of seed money for doing agricultural works to farming families does a lot to have more food staples. Extension of agriculture market, buffer stocks, proper pricing of agriculture produce by such government activities encourages farmers to involve intensively in agro-works. Revival of food bank at grass root level does better work during such time to have more assurance of food staples for needy workers, artisans displaced people and marginalized poor families. Establishment of food bank with the use of disaster management fund that is prevailing at local level could do a lot in such crisis period.

Poor farming families, daily wages workers of formal as well as informal sector workers, poor and indigenous ethnicities have also been severely hit by COVID-19 in Nepal. According to multidimensional index, 28.6 percent Nepalese are living with poverty and inequality. Due to the continuous lockdown; more poor farmers are unable to sell their products in the market, majority of daily wage workers are out of work or are compelled to give up the jobs as employer are not in the position of paying them salaries. Such workers, artisans or indigenous people are also affected much as they have no jobs; this means no money in their pocket to buy costly food items or to buy essential medicines.  Assurance of health check-up, medicine and food staples or similar relief packages is a must from the part of government and its concerned line agencies for such needy population or workers.

As Central Bank of Nepal (Nepal Rastra Bank) was involved on various pro-poor v/s rural development programs in the past, its presence is a must with its prudential policies viewing recent vs future adverse impact in the economy. More concession of interest rate or single monetary tool will not yield tangible outcome. Central bank can also finance the public sector directly, with the objective of expanding food program and safety nets, supporting the operation of health system, financing basic services, and investing in public works adjoining with government’s budgetary activities. These initiatives will definitely expand the money supply during the initial phase of crisis, the credit flow will be slow to trickle down, given the existence of pre-crisis liquidity shortage. Banks have to be activated with the aggressive measures and continuous surveillance to increase credit to all stakeholders, transcending beyond the current bias in favour of chosen organized sector, limited in numbers vice-a-vis rent informal agriculture, manufacturing and services.

Central bank should also monitor intensively the investment made by banking sector on public, cooperate and productive sector time to time. Central bank could urge entire financial institutions to allocate some nominal funds out of their profit margin for having Broad Based COVID-19 Re-finance Fund; such fund could be channelled especially on production-oriented enterprises that are run by the public. Additionally, micro finance institutions could be urged by central bank to invest in intensive agro-farming, animal husbandry, and fishery, pig- sheep rearing, etc., in rural areas with some incentive packages or tax waivers. During the time of recession, people are usually reluctant to consume or to invest in the economy. To fix ideal interest rate for savings or investment is indeed a daunting task.

During the time of recession, capital flight from the country may happen in the economy; in such a situation central bank should monitor and watch closely the status of liquidly transaction and movement. As more and more unskilled labours are returning from Indian cities to Nepal, they should be motivated to deposit or exchange Indian currency with easy mechanism by financial institutions functioning to their hometowns or areas. The prevailing mechanism of remitting money to Nepal from abroad and cost to remit money from abroad should be reviewed by central bank and must issue the labour friendly ordinance for it at the earliest. It has been expected that there would be more influx of Nepali worker in Nepal from abroad due to COVID-19 effect. Thus, central bank should be effortful to have safe e-banking and paperless financial activities in banking sphere.  

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