Covid-19 makes cash management a challenge in firms: Dr. Biswo Poudel, Economist

Dr. Biswo Poudel is an economist. He has long experience working with development partners and was also involved in providing policy recommendations on different occasions for the Government of Nepal. He has been closely watching the macro-economic performance of Nepal. Dr. Poudel talked with IBN Dispatch about the impact of Covid-19 and ways to cope with this crisis in Nepal.

How are you assessing the impact of Covid-19 in Nepal?

This Covid-19 is affecting the whole world and Nepali is not insulated. We have suffered economically, and its impact has begun to surface. We saw the impact before any occurrence of this pandemic in Nepal. Initially, the impact started from supply shocks with the halting of goods imported from China and gradually those from other suppliers. Because of the supply break, hydropower projects and other projects of a similar nature began to suffer. However, supplies of key consumable goods have not been significantly impacted. Impact can be seen in the exodus of people to villages from other parts of the country and abroad.

Which sectors are the most-affected by the pandemic?

We initially analyzed for sectors that have major contributions to Gross Domestic Product (GDP). The impact of the lockdown from mid-March will be visible in the hotel and restaurant sector, retail business, construction, and transportation sectors. Manufacturing and agriculture might not be affected given effective management of the supply chain. We should be satisfied even if we achieve the revised economic growth. Recent growth forecasts of 2.27 percent by the Central Bureau of Statistics (CBS) is based on the assumption that the lockdown will last until mid-Jestha with things going back to normal. Workers from different projects have dispersed, making their way home and it will take time to bring them back to work to resume construction activities. We also see a similar situation in the transport sector as well. The retail sector, specially malls and big cinema halls, will have to wait for a longer period to bounce back to normal functioning.

How are you assessing the impact of Covid-19 on the FDI front?

We do not owe much foreign loan, so repayment is not as worrisome. On the other hand, we are geographically remote and have a low performance on the export front. Many export-based countries like China may prefer Vietnam, India, Cambodia, Burma, and Malaysia, for investment. Such countries will be in a position to receive more benefits. Even before Covid-19, we lagged behind our peer countries in terms of attracting investment in the absence of a conducive economic policy to get the benefits from Foreign Direct Investment (FDI). Hence, a longer time is required for our economic revival from the impact of Covid-19.
We have not been able to attract FDI as compared to our efforts and requirement. Even in earlier years, we were not a star performer to become the preferred destination. Hence, we are not going to witness a sharp decline in FDI, to speak honestly. However, we can attract more investment in hydropower sector which is an appealing sector for us that cannot be offered by neighboring countries like India and Bangladesh.
Other sectors, particularly tourism, which is a niche market, has not been able to reap the benefits despite the fact that we have world class tourist destinations. We have the opportunity to attract investors from those countries that are affected most by Covid-19 by offering lucrative incentives. The amount of FDI will depend on how conducive we make our investment climate.

Remittance is estimated to shrink by over 18 percent due to Covid-19. What might be its economic and social impact in Nepal?

In the short run, remittance will definitely decline mainly caused by two shocks – Covid-19 and the crash in oil prices in the international market, especially for Gulf countries which are key destinations of Nepali migrants. There is no sign that oil price will rebound immediately after the Covid-19 crisis. The fate of oil prices in the international market is still unclear. A significant number of Nepali workers are working in the construction sector in Qatar, which is relatively unaffected. Employment of Nepali workers in Gulf countries will depends on the impact of stimulus packages they will bring out to deal with the crisis.
If radical stimulus packages are not introduced, they will not hire workers for new projects. In this situation, we can expect a higher number of overseas returnees compared to those departing to international labor market. For Malaysia, we have to wait to see how the situation unfolds. It seems that Malaysia can benefit from the manufacturing sector business that may divert from China. Korea and Japan have absorbed only a small portion of our labor force. In the case of Arab countries, remittance will decrease. For India, remittance will fall if the lockdown persists because laborers working in agriculture will return.
The impact of a drop in remittance will be felt in three different ways. First, shrinkage in remittance will hit consumption and people will face a difficult time to payback loans borrowed to go abroad. Second, it will increase inequality and the poor will have reduced access to credit. Third, social disturbances will rise with the decline in economic opportunities.

Amid such adversities, do you see any opportunities that Nepal can reap?

On the inflation front, the reduced price of fossil fuel may bring down inflation. In Nepal, many people have travelled to villages reducing the demand for commodities in the cities, a phenomenon that, as many assume, will pull down their prices. However, production will also see a setback due to labor shortages though we may benefit from a decrease in commodity price. We can observe a similar story in India. A reduction in manufacturing, will increase prices. Amid this sketchy scenario, we cannot make a prediction on inflation and its impact.
We can see an opportunity on the wage front. If more people do not move to Arab countries and a few return back, there will be a labor surplus so there will not be much pressure on wages. Moderation in wages will contain the cost of infrastructures projects such as express ways, hydropower, and irrigation projects which are vital for our economy. However, if we see a surplus of unskilled workers rather than skilled or semi-skilled workers, that can create a problem. We need to strategically manage all kinds of workers. We should think of a strategy on how to attract such skilled or semi-skilled ones.

How should the government respond during and post Covid-19?

The government should focus its efforts particularly on how to contain the spread of the virus and to generate employment opportunities. Hopefully, a vaccine might be developed and will be available in the market. But our government has not imported enough PPEs, masks, and PCR testing equipment. For the vaccine, government should be alert on supply arrangements and respirators for district hospital. From countries with lowering curves, we might have to buy ventilators, medicine and make them accessible to regional hospitals and districts. This is the first responsibility.
Containment and employment are major responsibilities of the government for the next six month. After six months, focus should be on how to restart ongoing construction projects. We might face some problems in business negotiations with investors. Another challenge is how to encourage industries that are using domestic raw materials for instance agro-based industries and how to revive other sectors such as tourism and hydropower.
Third is on the long-term positioning of the country internationally. If many factories seek to operate beyond China, our focus should be in efforts to bring them to Nepal. Rather than competition with bigger industries, we can be part of their value chain. We should look on aspects of the value chain and negotiate accordingly. What we have seen is, we cannot isolate ourselves. We should be part of the global economy.

To cope with this situation what policy intervention can the Nepal Rastra Bank (NRB) make?

The NRB can work on cash management for firms that have been suffering from the lockdown. Even big firms that have assets are facing a cash crunch. We should carefully explore the way to ease this situation. For some firms, the government can ease their supply chain and create a conducive environment for them to operate. Many firms have taken loans and are going to face cash flow problems due to a disruption in the supply system. As a regulatory body in the financial sector, NRB can step in and devise measures to support their cash management. Also, Small and Medium Enterprises (SMEs) should be provided relief through interest waiver for a certain period. This has been practiced previously as well. The NRB should take an innovative and proactive approach rather than just responding to formal appeals made by entrepreneurs.

How are you assessing the impact of Covid-19 in Nepal’s international trade?

I am not worried about the trade deficit, nor was I in the past. For instance, if you observe, export was almost half of our import around early 2000s. Now export has dipped to around 5 percent of export. Ballooning trade deficit is linked with our growing remittance over the period. Our import has increased but we could not increase export proportionately. Our imports are not based on loans. Consumption increased from remittance and for government, it became an easy source of revenue. It did not have a negative impact in the economy. The growing import of capital goods such as heavy equipment, machineries, transport vehicles, aircrafts, among other pushed up the import bill. The growing purchasing power backed by overseas remittance encouraged more consumption of goods leading to higher import. We have purchased food imports as well. Import per se is not bothersome. The nature of it should be to increase productivity, contributing to achieving long term goals. It offers an opportunity as well. Why could we not produce those materials by ourselves? It is an important question. If we import, machinery and other assets it is not worrisome. If import extravagant things, then we should be serious about it. We should encourage our industrialists to produce things that can be produced inside our country. But they are only focused on trading, which is my concern. The NRB should distinguish between traders and entrepreneurs and give priority to entrepreneurship by providing incentives including concessional loan.