WORLD BANK REPORT Nepal’s Growth At 0.6

The World Bank projects a bleak growth outlook for Nepal’s economy in 2021

Jan. 17, 2021, 11:47 a.m. Published in Magazine Issue: VOL. 14 No. 10, January 08, 2021 ( Paush 24, 2077) Publisher: Keshab Prasad Poudel Online Register Number: DOI 584/074-75

As Nepal’s political crisis has entered a new era following the dissolution of the House of Representatives by Prime Minister K.P. Sharma Oli, the recently released report of the World Bank shows a bleak economic scenario.

At a time when Nepal needs a strong government to take drastic economic reforms, the government has turned out to be a lame duck and weak with no authority to take a major decision. As the ruing NCP splits following the dissolution, the new government will be a coalition of different political parties.

Till a few months ago, Nepal’s economy was moving in the right direction with the implementation of federalism. The recent report shows a much grimmer situation. With the growth in average of 7 percent in the last four years, Nepal had made an enormous progress.

Nepal’s economic growth in 2021 will likely to be around 0.6 percent. According to the World Bank’s Global Economy Report, South Asian economy is projected to expand by 3.3% in 2021. The report warns that development risks remain as economic activity and incomes are likely to stay low for extended period.

“The region is projected to grow by 3.3% in 2021. Weak growth prospects reflect a protracted recovery in incomes and employment, especially in the services sector, limited credit provisioning constrained by financial sector vulnerabilities, and muted fiscal policy support,” states the report.

The forecast assumes that a vaccine will be distributed on a large scale in the region starting the second half of 2021 and that there is no widespread resurgence in infections. In India, growth is expected to recover to 5.4% in 2021, as the rebound from a low base is offset by muted private investment growth given financial sector weaknesses. In the financial sector, non-performing loans were already high before the pandemic.

In Pakistan, the recovery is expected to be subdued, with growth at 0.5% in FY 2020/21. Growth is projected to be held back by continued fiscal consolidation pressures and service sector weakness. In economies that rely on external sources of growth such as manufacturing exports (Bangladesh) and tourism (Bhutan, Maldives, Nepal, Sri Lanka), the recovery is likely to be particularly modest.

Tourism revenue is likely to remain significantly below pre-pandemic levels because of depressed demand as potential tourists remain wary of social interactions and continued restrictions on international travel, although recent vaccine news offers hope.

Risks to the outlook are tilted to the downside. They include more severe and longer-lasting infection rates from the pandemic, financial and debt distress caused by an abrupt tightening of financing conditions or possible widespread corporate bankruptcies, adverse effects of extreme weather and climate change, weaker than-expected recoveries in key partner economies, and a worsening of policy- and security-related uncertainty. Additional stress on domestic banks in the region could be triggered by the economic consequences of a more protracted recovery from the pandemic, which in turn could lead to a rise in bankruptcies and weaken balance sheets of the banking and non-banking sectors among several economies of the region (Bangladesh, Bhutan, India, Sri Lanka). Extreme weather events also remain an important regional risk.

The global economy is expected to expand 4% in 2021, assuming an initial COVID-19 vaccine rollout becomes widespread throughout the year. A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the World Bank says in its January 2021 Global Economic Prospects.

The COVID-19 pandemic has caused deep output losses and contributed to a sharp rise in poverty and unemployment in South Asia. Output in the region contracted by an estimated 6.7% in 2020, reflecting the effects of the pandemic and nationwide lockdowns, particularly in Bangladesh and India. Activity rebounded in the second half of last year, led by industrial production, as initial stringent lockdowns were eased. In India, the pandemic hit the economy at a time when growth was already decelerating.

Output is estimated to contract by 9.6% in Fiscal Year 2020/21, reflecting a sharp drop in household spending and private investment. The informal sector, which accounts for four-fifths of employment, has also been subject to severe income losses during the pandemic.

Recent high frequency data indicate that the services and manufacturing recovery is gaining momentum. In the rest of the region, the economic impact of COVID-19 has been somewhat less severe but still significant.

Economies that depend heavily on tourism and travel have been especially hard hit (Maldives, Nepal, Sri Lanka). In Bangladesh, which had been one of the fastest growing emerging market and developing economies prior to the pandemic, growth is estimated to have decelerated to 2% in FY2019/20. In Pakistan, growth is estimated to have contracted by 1.5% in FY2019/20, reflecting the effects of localized COVID-19 containment measures as well as the impact of monetary and fiscal tightening prior to the outbreak.

Although the global economy is growing again after a 4.3% contraction in 2020, the pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period. Top near-term policy priorities are controlling the spread of COVID-19 and ensuring rapid and widespread vaccine deployment. To support economic recovery, authorities also need to facilitate a re-investment cycle aimed at sustainable growth that is less dependent on government debt.

“While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges—in public health, debt management, budget policies, central banking and structural reforms—as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth,” said World Bank Group President David Malpass. “To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labor and product market flexibility, and strengthen transparency and governance.”

The collapse in global economic activity in 2020 is estimated to have been slightly less severe than previously projected, mainly due to shallower contractions in advanced economies and a more robust recovery in China. In contrast, disruptions to activity in the majority of other emerging market and developing economies were more acute than expected.

“Financial fragilities in many of these countries, as the growth shock impacts vulnerable household and business balance sheets, will also need to be addressed,” Vice President and World Bank Group Chief Economist Carmen Reinhart said.

The near-term outlook remains highly uncertain, and different growth outcomes are still possible, as a section of the report details. A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit the global expansion to 1.6% in 2021. Meanwhile, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent.

In advanced economies, a nascent rebound stalled in the third quarter following a resurgence of infections, pointing to a slow and challenging recovery. U.S. GDP is forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020. In the euro area, output is anticipated to grow 3.6% this year, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.

As severe crises did in the past, the pandemic is expected to leave long lasting adverse effects on global activity. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and labor force declines in many advanced economies. If history is any guide, the global economy is heading for a decade of growth disappointments unless policy makers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable growth.

The most pressing policy priority in the short-run in most countries is likely to be rapid and widespread distribution of COVID-19 vaccines. However, beyond this immediate policy priority, more action is needed to promote a return to robust long-term growth. But priorities will differ among individual countries depending on their country characteristics. At the country level, some of the most pressing reforms are long overdue; other long-standing reform needs have been cast into a new, more urgent light by the pandemic; and yet other reforms are needed to address new challenges raised by the pandemic.

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