World Bank projects Nepal’s economic growth for 2020-21 at 0.6 percent

Nepal’s economy came to a standstill mainly due to the lockdown in the last fiscal year that ended in mid-July, registering a negligible growth of 0.2 percent. But despite businesses being open now, the outlook is bleak for the current fiscal year too.

The economy is projected to grow by just 0.6 percent, as Covid-19 periodic and localised lockdowns continue and disruptions to tourism are expected to persist, according to the World Bank’s latest South Asia Economic Focus released on Thursday.

But should Covid-19 persist, disruptions continue and weak subnational capacity to implement relief spending weaken, growth could fall to 0.1 percent. On the other hand, if an effective vaccine becomes available, growth could recover to 2 percent, according to the multilateral funding agency.

The country’s economy is experiencing severe distress and since there is uncertainty around the coronavirus and there is the lack of a solid plan for recovery, more pain is likely ahead, economists have warned.

“This fiscal year, we are expecting all the sectors, except agriculture, to be in the negative territory,” said economist Shankar Sharma. “Due to the timely and abundant monsoon and though chemical fertiliser was not available on time, the agriculture sector may be able to save the country’s economy to some extent.”

The slowing of economic growth means incomes will stagnate or even fall and this will impact the living standards of people, especially those with lower incomes.

“Most informal firms operate with limited savings, and owners may face the difficult choice of staying home and facing starvation during the lockdown or running their business and risking infection,” said the South Asia Economic Focus. “These scenarios accentuate financial difficulties as well as the spread of Covid-19.”

In Nepal, coronavirus cases were initially restricted to areas bordering India, but later surged also in urban areas. When the country went into lockdown on March 24, there were just two reported cases. But by the time the government lifted the lockdown on July 21, without utilising the period to improve health care facilities and increasing the number of hospital beds and ventilators, the number of cases had crossed the 17,000 mark.

Since then there has been no let-up and the cases have been increasing at an alarming rate.

Nepal has entered a second wave that is much more severe than the first, according to the World Bank report.

Nepal saw a record single-day surge in Covid-19 cases on Thursday with 4,364 people testing positive. The national tally currently stands at 98,617, with more than 26,000 active cases.

Amid all the doom and gloom, remittance so far has been a silver lining.

Remittance inflows to Nepal increased by a surprising 23 percent, in the first month of the current fiscal year, fortunately, refuting forecasts that the income of Nepali migrant workers would crash due to the coronavirus pandemic affecting the global economy.

The growth in remittance has been surprising despite tens of thousands of Nepalis migrant workers being out of the job in major hiring destinations abroad.

 

“As people are travelling to India en masse for jobs, remittance may not fall drastically and this may contribute to consumption stability,” said Sharma, a former vice-chairman of the National Planning Commission. “But the worrying factor is that absolute poverty would rise.”

Informal businesses make up around 50 percent of enterprises in Nepal and are the main source of income for most of the labour force. Within this group, urban informal sector workers and self-employed households in urban areas are more vulnerable than rural households who can fall back on subsistence farming, the bank said in a statement.

According to Faris Hadad-Zervos, the World Bank Country Director for Nepal, the Maldives and Sri Lanka, the economic consequences of the pandemic and impact on livelihoods across Nepal are expected to be the most acute for informal workers or those without social security or assistance, who are more at risk of falling into extreme poverty.

“Swift action is needed to provide incomes, social protection, and employment to support them,” said Hadad-Zervos. “This includes key investment climate reforms to promote physical infrastructure and access to finance for the informal sector to shorten the transition to recovery.”

In the three years prior to the pandemic, the economy grew at an average rate of 7.3 percent, against a backdrop of political stability and policy emphasis on investment, productivity and effective public institutions. Still, Nepal’s economy remains hampered by structural challenges, including heavy reliance on remittance-fueled consumption, and a higher concentration of employment in agriculture.

“It has been a tradition with this government to estimate whatever it likes without a proper basis,” said former finance minister Ram Sharan Mahat. “Last fiscal year, it projected 8.5 percent growth, which was overly ambitious and that growth rate has been trimmed to 0.2 percent by the World Bank.”

When the Oli government presented its budget for this fiscal year on May 29, Nepal was under lockdown and in the midst of the pandemic. Despite that the government set an overly ambitious target of 7 percent.

 

“Despite Covid-19 becoming a major threat to the economy, the government failed to realise its consequences,” said Mahat. “It said a 7 percent growth target, which too has been trimmed to 0.6 percent.”

The multilateral funding agency’s twice-a-year regional update notes that South Asia is set to plunge this year into its worst-ever recession taking a disproportionate toll on informal workers and pushing millions of South Asians into extreme poverty.

The report forecasts a sharper than expected economic slump across the region, with regional growth expected to contract by 7.7 percent in 2020, after topping 6 percent annually in the past five years.

Regional growth is projected to rebound to 4.5 percent in 2021.

Factoring in population growth, however, income-per-capita in the region will remain 6 percent below 2019 estimates, indicating that the expected rebound will not offset the lasting economic damage caused by the pandemic.

In previous recessions, falling investment and exports led the downturn.

“This time is different as private consumption, traditionally the backbone of demand in South Asia and a core indicator of economic welfare will decline by more than 10 percent, further spiking poverty rates,” said the World Bank.

The report urges governments to design universal social protection as well as policies that support greater productivity, skills development, and human capital.

Covid-19 will profoundly transform Nepal and the rest of South Asia for years to come and leave lasting scars on its economies, said Hans Timmer, World Bank Chief Economist for the South Asia Region.

Economist Sharma said that the government needs to launch social protection and job retention schemes as well as policies that support greater productivity and skills development.

“The government needs to act, invest and spend,” said Sharma, “rather than becoming happy on its unspent treasury.”

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