COVID-19 Economic Implications

Although Nepal is yet to release any study on the economic implications, COVID-19 will have far reaching economic consequences to Nepal

May 22, 2020, 9:47 a.m. Published in Magazine Issue: VOL. 13 No. 16, April.17, 2020( Baisakh 05, 2077) Publisher: Keshab Prasad Poudel Online Register Number: DOI 584/074-75

Remittances of this fiscal year will be adversely affected by this pandemic reflecting travel restrictions to contain the contagion and weaker demand in destination countries. Similarly, Nepal’s hospitality industry, particularly tourism sector, has badly suffered.

As the new budget is on its way, Minister for Finance, and Communication and Information Technology Dr. Yuba Raj Khatiwada is under stress to allocate the budget in priority sectors.

Although Nepal’s multilateral development partners have pledged their support to Nepal in mobilizing external resources for the prevention and treatment of the COVID-19 and rehabilitation of lives and businesses affected by the pandemic, the internal situation is very meager, not enough alone given the declining revenue generation and shutdown of other economic activities.

Growth at 2.27 percent

The government has projected that the economy of the country will expand by just 2.27 per cent this year breaking the high growth trajectory of above 6 per cent for the last three consecutive years.

"The economy will grow by 2.27 per cent at the constant price in the current FY, however, the estimates were made on the basis of the impacts of the pandemic on hotel, restaurants and international transportation since the situation in the recent future is unknown," said the CBS. But it said it was hopeful that the other economic sectors would revive gradually from mid-May.

"Severe impact of the coronavirus pandemic in major economic sectors and internal and external measures applied to check the spread of the virus will have repercussion in the growth of the Gross Domestic Product (GDP) of the country," writes a daily quoting Central Bureau of Statistics (CBS).

As per the World Bank's projection, the GDP in Nepal is expected to grow between 1.5 to 2.8 percent in the ongoing fiscal year while the growth would be roughly 3 percent in the 2021 fiscal year. It is a big hit for Nepal like in the other parts of the world. Remittances will directly affect foreign exchange. Employment and migration, trade and tourism sector will also be directly hit in Nepal.

The World Bank expects that Nepal's inflation will go above six percent in the current fiscal due to the supply shock while both fiscal deficit and the current account deficit are expected to widen.

Development Partners

As Nepal has been exploring ways to narrow the gaps, Nepal’s multilateral partners have also come out with financial packages. International Monetary Fund, the World Bank and Asian Development Bank have already announced support measures.

The IMF Executive Board approved the 50th request for emergency financial assistance to help its member countries address the challenges posed by COVID-19.

The IMF Executive Board approved the disbursement of US$214 million in emergency financing to help Nepal address urgent balance of payments needs created by COVID-19, which is having a severe impact on remittances, tourism, and domestic activity, and will substantially weaken Nepal’s GDP growth, balance of payments, and fiscal position.

To address the pandemic, the Government of Nepal has taken measures to increase health spending, strengthen social assistance, ensure adequate liquidity in the financial system, and support access to credit.

IMF financing will help fill immediate financing needs and will catalyze additional financing from Nepal’s development partners to support the COVID-19 response.

The World Bank

The World Bank has approved a fast-track $29 million COVID-19 Emergency Response and Health Systems Preparedness Project to help Nepal prevent, detect, and respond to the COVID-19 pandemic and strengthen its public health preparedness. The agreement was signed by the Ministry of Finance and the World Bank.

The project will focus on the immediate response and preparedness needs to fight the virus. The project provides emergency support to enhance Nepal’s capacity to detect cases and ensure prompt contact tracing consistent with World Health Organization (WHO) guidelines and Ministry of Health and Population protocols. It will also help set up new intensive care units, beds, and isolation facilities across the country. The project will be implemented by Ministry of Health and Population.

“We are thankful to the World Bank for the responses in a record short period of time, which will help Nepal respond to the COVID-19 pandemic and strengthen our capacities to deal with future public health risks,” stated Sishir Kumar Dhungana, Finance Secretary. He added, “Immediately after the outbreak of COVID-19 in the country, the Government of Nepal has made several arrangements to prevent and address the possible crisis. Due to these measures, the socio economic activities are going to be affected. Further support is being anticipated from the World Bank to cope with the emerging pandemic situation.”

Asian Development Bank also agreed to provide similar kinds of support to Nepal. ADB’s chair person assured finance minister Dr. Khatiwada of necessary support to Nepal.

Along with multilateral agency, bilateral agencies are also coming with support. European Union also announced a package of R.10 billion to support Neal.

Nepal’s development partners have expressed their interest in working with the government in tackling the challenges posed by the crisis in a video conference.

Nepal’s Target

Despite the shortcomings, Finance Minister Dr. Yubaraj Khatiwda is presenting his new budget aiming to address all pertinent economic issues of Nepal. Addressing the House of Representatives, Dr. Khatwada has made it clear that the budget will announce certain relief packages to the industrial sector.

“We aimed for at least 6.5 to 7.5 per cent growth this year. Initially, we aimed for 8.5 per cent growth but the reduction in the production of paddy would hit the expansion. The coronavirus crisis has supplemented the challenges and the country has lost about Rs 150 billion so far and is likely to lose Rs 300 billion by the end of this fiscal,” said Minister Dr. Khatiwada. “Some large scale pride projects would have been completed and started capital formation, and investment would have increased had the COVID-19 crisis not hit the country.”

There will be depreciation of investment and no production from the private sector. The pandemic has hit the employment, investors’ confidence, planning and enthusiasm. This crisis will affect the growth next year as well.

Minister Dr. Khatiwada, however, is hopeful that the country will recover soon. Similarly, the crisis will have a profound impact on individual’s perspectives on life, society, employment and economic activities. The crisis has affected income, employment and poverty alleviation the most.

There is also a seasonal poverty which appears when food is finished and bread earner of the family goes out for work. Such families will come back to normal after the lockdown is lifted. However, the people who permanently lose their jobs are at risk of being pushed down to poverty again.

“I would like to assure that we won’t let anyone be pushed out of their job. At the same time, social security provisions cover a large number of people including the vulnerable citizens which will work as a relief to people. Meanwhile, Prime Minister’s Employment Program will connect people who want to work. It will create meaningful employment. However, the wage and salary will not increase this year as we need to mobilize resources in other sectors due to the new crisis. When the employment is not snatched away, we can survive even by cutting our cost of food and clothes as well. However, although people would be saved from falling down into poverty, the rate of poverty alleviation would be slowed down by COVID-19,” said Finance Minister Dr. Khatiwada.

Relief Packages

Finance Minister and spokesperson of the government Dr. Yubaraj Khatiwada said that the relief package approved by the cabinet meeting will cover larger areas and provide relief to the people.

Announcing the relief package through Nepal Television, Minister Dr. Khatiwada urged landlords to exempt rent to daily wage earners for a month. He said that the government will rebate on house rent tax if discount provided on rent.

He announced that the relief package includes 25% rebate on electricity, no penalty if electricity and water bills cleared till Baisakh end, 25% discount on data and voice call VAT, Income Tax and Advanced Tax payment deadline extended till Baisakh 25, and 10% rebate on food supplies procured from Nepal Food Corporation.

Minister Dr. Khatiwada said that Ministry of Health and Population will be accorded additional budget for procurement of medical supplies.

He also announced customs waiver on medical equipment and loans to be channeled to epidemic affected areas. The minister also directed employers to pay salaries of wage workers of organized and unorganized sectors.

A meeting of the Council of Ministers has taken a decision to provide relief package for those affected along with extending nationwide lockdown.

New budget

As the Ministry of Finance has started to prepare the budget, all the sectors are expecting something from the government in a package. Hotels, industries, airlines and service sectors are badly hit. However, the annual budget has its limitations. Given the current circumstances, there are more restrictions and limitations.

“Budget is a continuous process so we should not expect new budget every year. Good programs and projects have been affected by the pandemic, we have to complete them. Livelihood and public aspirations need to be addressed since they are inscribed as the fundamental rights in the constitution and are the responsibility of the government,” said finance minister Dr. Khatiwada.

“The budget will also be directed to address the challenges created by the COVID-19 in the health and economic sectors. Contraction in economy, employment and resources are the biggest challenges that need immediate response from the government. Likewise, budget will be guided by the 15th periodic plan and government policy and programs. The budget of the sub-national bodies will also be reprioritized in the context of the current crisis,” said the minister.

As the revenue collection is hit hard by the lockdown and foreign economic cooperation can also be affected by the resource constraints, the government is under pressure to increase the social sector spending.

“We are discussing the size of the budget. We are hopeful about economic activities rebounding soon after the crisis is over. The gap created by the slump in remittance will be filled up by the international financial support. The country has signed agreements of more than Rs 150 billion in international support that would be mobilized in the next fiscal year. We are weak in terms of absorption of the foreign support. Our spending capacity must be enhanced and decision making mechanism should be sound and prompt. However, we must be prepared for a slight disturbance created by the internal resources which will be shrinking due to the coronavirus pandemic. The government will raise internal debt with the need assessment and won’t let the private sector businesses suffer from resource crunch due to government’s borrowing,” said Minister Dr. Khatiwada.

Unlike other crisis in the past with limited impact, COVID-19 has posed challenges to both the humanitarian and economic fronts. All the countries around the world have been facing major economic challenges and Nepal is no exception.

“There will be greater challenges and severe impacts on life and economy so we need to adopt innovative social and economic measures to overcome this crisis,” said Dr. Khatiwada.

The pandemic has already started to affect the remittance flow and disruption of trade and shutdown of the industry have caused a fall in revenue collection at historical level. Along with this, large numbers of people are going to be laid off by the industry in the coming days.

Given such circumstances, there is the need to mobilize additional resources. The government has to support the banking sector providing package to extend the loan repayment duration.

As Nepal has limited resources and options, Nepal’s economy will depend on how the new budget and economic policy align with the new long term vision.

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