Covid-19 Impact on Economy : Counting the Cost and the Road to Recovery

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Covid-19 Impact on Economy : Counting the Cost and the Road to Recovery

Times are indeed difficult for a country like Nepal where the economic foundations are weak. The fallout from the COVID-19 crisis can be disastrous if the situation isn’t tackled carefully.

--BY  SANJEEV SHARMA

In normal times, Nepal gets over 300,000 foreign visitors during the spring tourist season of March-May with the occupancy rate of hotels soaring to over 60 percent keeping the hospitality industry busy. This time, however, it is different with hotels practically empty and no one working. This has led to a situation where even the biggest hotels and restaurants in the country have found themselves unable to pay their staff salaries.

The wrath unleashed by the novel coronavirus (COVID-19) pandemic has been so strong that the travel business across the world over the last three months has declined by more than 90 percent compared to 2019. With almost every country enforcing a full or partial halt to the movement of people in a bid to stop the deadly pathogen from spreading, international travel has been decimated and countries like Nepal, for whom tourism is a major avenue of foreign currency earning and employment generation, are paying a heavy economic price.  

A Deep Economic Slump
With the COVID-19 pandemic ravaging the global economy, the impact has been severe for Nepal which had mostly remained insulated from global shocks in the past.The economic headwinds created by the worldwide health emergency have been so intense and swift that things have gotten from bad to worse in just a little over a month for the Nepali economy.

Had the situation been normal, Nepal’s economic growth in the current fiscal year would have been close to 6.5 percent as many prominent economists had expected. The Finance Minister, Dr Yuba Raj Khatiwada in mid-February, had even euphorically claimed that this year’s GDP growth would touch the historic heights of 8.5 percent. However, with the lockdown coming into force from March 24, imposed by the government in response to the global coronavirus outbreak, Nepal’s economy has been thrown into a slump so deep that it threatens the very existence of the country’s socio-economic foundations.

The National Accounts Statistics, an annual report of the Central Bureau of Statistics (CBS) incorporating sector wise macroeconomic indicators, published on April 29 paints a gloomy picture of the abrupt change in direction of Nepal’s economy in the wake of the COVID-19 pandemic. According to the CBS report, Nepal’s GDP growth will only be 2.27 percent in FY2019/20 compared to 6.75 percent and 6.35 percent in FY2018/19 and FY2017/18, respectively. CBS has expected primary, secondary and tertiary sectors of the economy growing at 2.54 percent, 3.36 percent and 1.99 percent, respectively. CBS has forecasted that five sectors including hotel and restaurants, retail, construction, transportation, mining and telecommunications will register a negative growth in the current fiscal year. The downturn in the forecast has been calculated on the basis of expecting the lockdown to be lifted by May 8 with economic activities gradually returning to normalcy.

Earlier on April 12 releasing its twice-a-year-regional update South Asia Economic Focus, the World Bank forecasted Nepal’s growth to fall to a range between 1.5 and 2.8 percent in the fiscal year (FY) 2020 reflecting lower remittances, trade and tourism, and broader disruptions caused by the COVID-19 outbreak.“A prolonged outbreak of COVID-19 would impact growth significantly with a further deceleration or contraction in services and industrial production,” reads the report. The bank predicts that economic growth during FY2021 is also likely to remain subdued due to the lingering effects of the pandemic with some recovery expected in FY2022.

Though a picture of how hard the Nepali economy has actually been hit by the coronavirus rampage is yet to emerge, the monetary loss is expected to amount to hundreds of billions. Talking to BBC Nepali on April 16, Finance Minister Dr Khatiwada said that the monetary loss could amount to Rs 200 billion. However, various estimates indicate that the actual loss could go as high as Rs 600 billion taking into account the losses incurred by remittance, hospitality, aviation, retail, trade and manufacturing, among other sectors.

Understanding the Pandemic-induced Economic Crisis
Unlike the past economic crises including the Great Depression of the 1930s, the 1997 Asian Financial Crisis and 2008 Global Financial Crisis and Eurozone Sovereign Debt Crisis that occurred as results of shocks in the financial markets, the economic crisis of 2020 is different as it has been caused by a worldwide health emergency. The abrupt halt in economic activities the world over has been the result of governments trying to stop the contagion of the coronavirus which is believed to have started from the Chinese city of Wuhan, capital of Hubei province, in early December.

Faris Hadad-Zervos, country manager of World Bank for Nepal, puts it this way. “This economic recession is different from past recessions. Generally, a recession impacts investment and demand of goods; recessions are driven by demand. However, the current recession is driven by supply due to the outbreak of a disease. We are facing a situation where demand has not decreased but supply is less. Understanding this recession in a different light will help us to use new and specific tools to revive the economy,” he said, during a webinar organised by the Society of Economic Journalists-Nepal (SEJON) on April 22.

According to him, the sharp fall in remittance inflow would impact the foreign exchange reserves of Nepal and the country’s employment and migration, trade and tourism will be directly affected by the outbreak. “We have expected that the inflation rate in Nepal will hover over 6 percent due to the supply shock. The country’s fiscal deficit and current account deficit will also be extended,” he mentioned, adding, “The economic downturn in the two large neighbours will also negatively impact the growth of Nepal.”

In a bid to contain the spread of coronavirus, governments across the globehave imposed lockdowns putting strict restrictions on the movement of people. As a consequence of the lockdowns, international trade and commerce have been disrupted to a large degree.

The World Trade Organization (WTO) has estimated that the decline in global trade will be between 13 percent and 32 percent as the pandemic continues to disrupt economic activities across the world. Disruption in the supply chain has been the worrying aspect of this downturn. Like other South Asian countries, Nepal’s already weak logistics and supply chains are taking a hit from the lockdown. Though the flow of daily essential items and medical goods has remained relatively smooth, the problems in supply chain management are becoming apparent at border customs. It has been reported that thousands of Nepal-bound containers carrying other goods are stuck at Birgunj Dry Port and Biratnagar due to a delay in clearance.

COVID-19 Business Ramifications
Termed as “The Great Lockdown” by the International Monetary Fund (IMF), the depth of the current recession has already surpassed the recessions post-1950 and is nearing the levels seen during the Great Depression of the 1930s. The Washington DC-based agency in a report published in mid-April warned that the on going crisis is "like no other" and predicted that world economic output will shrink by three percent this year, before experiencing a partial rebound next year. The ramifications of this fallout have been very difficult for Nepali businesses. “All small, medium and large sized businesses have been adversely affected by the pandemic. The risk to the survival of private sector institutions will impact employment and government revenue and the socio-economic fallout from this will be very deep,” said Shekhar Golchha, senior vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) during an online Impact Talk series organised by the Nepalese Young Entrepreneurs Forum (NYEF) on April 21.

While the actual size of the damage done to the business sector is yet to come, preliminary data of some industries clearly indicate the scale of the ongoing economic rampage. For instance, companies in the aviation sector have been among the hardest hit as both international and domestic flights have remained suspended for over a month. Amid the growing number of coronavirus cases across the world, the government in the third week of March announced the suspension of all international and domestic commercial flights till April 15 which was later extended to May 15.

According to Yograj Kandel, spokesperson of Airlines Operators Association of Nepal (AOAN), flights have slumped by 98 in helicopter routes, 80 percent in short-take-off-landing (STOL) routes and 60 percent in trunk routes since the start of the lockdown on March 24. Kandel said that the business of domestic aviation companies has shrunk by 60-70 percent which could peak to 95 percent till the end of the lockdown. “There are around 4,000 people working in the Nepali aviation sector. We fear that the jobs of 75 percent of aviation employees are at risk,” he mentioned.

The impact of the pandemic-induced crisis becomes even more clear in the hospitality industry which is on the verge of complete collapse. “The current situation is very grim with 99.5 percent of the hotels shut down. Our analysis indicates that HAN members will bear a monthly loss of Rs 800 million to Rs 1 billion as a result of the pandemic. And, of course, if the situation persists, the sector will incur even further losses,” said Shreejana Rana, president of Hotel Association Nepal (HAN). Hoteliers first started seeing the effects of the virus towards the end of January and beginning of February when room bookings and footfall of guests slowly began to decline. “In comparison tolast year, the hospitality sector has suffered a loss of close to 90 percent till date. We are facing an anxiety filled environment with jobs on the line and businesses at stake,” she expressed. According to Rana,while it is evident that it will not be possible for the sector to recover in 2020, at this moment, even normalcy in 2021 remains a big question mark.

Other sectors such as manufacturing have also taken a hit from the pandemic. While it has been relatively easier for producers of goods that are listed as ‘essential items’ such as medicine and food, others are dealing with adversity and uncertainty. For example, manufacturers of construction materials have registered record losses over the past month. Producers of steel and cement, who were already under pressure before the lockdown due to sluggish demand in the market, are observing the demand for essential construction materials depleting to zero since the lockdown. According to Cement Manufacturers’ Association of Nepal (CMAN), the cumulative business loss of all cement producers has amounted to over Rs 22 billion in the five weeks of lockdown. Similarly, the production and sales of steel have come to a grinding halt. The Nepali steel industry, which has an estimated total investment of Rs 400 billion, provides employment to over 10,000 people.

More worryingly, the pandemic has put a brake on the growth of remittance to Nepal. After more than two decades of continuous growth, remittance inflow has declined dramatically by 40-50 percent. As employers in countries affected badly by the COVID-19 outbreak have been cutting their workforce, many Nepal is working there have become jobless. It has been estimated that nearly a million Nepal is working in Gulf nations such as Saudi Arabia, UAE and Qatar, that have taken a double hit by the coronavirus outbreak as well as the oil price crash, and those in other countries such as Malaysia, South Korea and India have lost their jobs. “Remittances are likely to continue to decline over the next couple of months. We will see a drastic fall in remittance after Baisakh (March-April). Besides the layoffs in companies, it is partly because of the inability of remitters to go to banks and remit companies to send their money back home due to restrictions in the movement of people,” said Suman Pokharel, CEO of IME Limited. He predicts that remittance inflow will fall by 15 percent for the whole of 2020. “But this totally depends on how long the coronavirus and restrictive measures like social distancing and lockdown will be,” mentioned Pokharel.

Remittance is considered as one of the key role-playing factors to prop up Nepal’s economic growth. The money coming from abroad has not only helped Nepali households to come out of absolute poverty (from 42% in 2001 to 18% in 2019) but also has propelled aggregate demand in the market thus increasing imports as well as production within the country. Remittance as percentage of GDP is 29 percent in Nepal and a decline in remit income means a decrease in consumption, bank deposits and other key economic activities. As per various estimates, remittance to Nepal will decline by up 20 percent in the current fiscal year. A report published by the World Bank has forecasted the inflow will decrease by 14 percent in FY2019/20 from USD 8.79 billion in 2019. “The COVID-19 eruption is having a significant impact on the worldwide flow of remittance and the remit-dependent countries like Nepal will be affected most economically,” the report reads. Nepal Rastra Bank (NRB) had earlier expected remittance to grow by 5 percent this year to reach USD 9 billion. As of March-April 2020, the country has received USD 5.2 billion in remittance, according to NRB.

Government’s Response and the Road to Recovery
The government’s policy response so far has been transfer of budgets allocated in the annual expenditure programme, deferment of tax filing, subsidy on food distribution and tariff waivers of water, internet and electricity, etc; these measures were announced by the government on March 29, five days after imposing the lockdown.  On the same day, the central bank also introduced relief measures including deadline extension for debt servicing to allow borrowers to pay bank loan installments by mid-July instead of mid-April, slashing of cash-reserve-ratio (CRR) of BFIs to free-off around Rs 35 billion in bank capital and raising the size of the refinance fund to Rs 60 billion.

However, unlike other South Asian nations that have announced comprehensive stimulus packages to rescue private sector companies, neither the government nor the central bank in Nepal have introduced substantial monetary and fiscal stimulus programmes to support the pandemic-stricken businesses and livelihood of needy citizens. India, for instance, unveiled a USD 22.6 billion package which includes direct cash transfer to the poor citizens, suspending Insolvency and Bankruptcy Code for six to 12 months to provide valuable time to crisis-stricken businesses in terms of refinancing and bailout negotiations. Similarly, the Reserve Bank of India (RBI) has slashed its key interest rate in an attempt to supply the financial market with additional money and make loans cheaper.  Similarly, Bangladesh has announced a stimulus package of USD 11.6 billion, equivalent to 3.5 percent of the GDP, in a bid to support its manufacturing, agriculture and service sectors. Finance Minister Dr Khatiwada has hinted the private sector not to expect stimulus packages like in other countries. “The government will take necessary steps evaluating the risks. While asking support for the private sector, the capacity of the government also needs to be seen. The government can provide relief generously only when the private sector pays taxes significantly,” he said addressing the ‘National Webinar on Alleviating the Distress of COVID – 19: Role of Financial Sector’ organised by the Institute of Chartered Accountants of Nepal (ICAN) on May 1. Dr Khatiwada mentioned that banks won’t be distributing cheap money like in advanced countries due to the costs associated with bank deposits. “How can there be a good level of liquidity management by putting depositors at risk? While asking the central bank to provide subsidies, we also need to look closely into achieving financial sustainability,” he said.

However, statistics related to Nepal’s financial position indicate that Nepal can take measures like printing money to distribute to citizens to boost aggregate demand and offset losses such as decline in remittance. Nepal’s low debt-to-GDP ratio of 30 percent leaves enough room to take policy actions such as printing more money and taking additional loans to finance its budget requirements. High debt-to-GDP ratio has become a big challenge for many developed and emerging economies to take such measures, but that is not he case for Nepal.

Stimulus of 5% of GDP Needed : Private Sector

Stating that the lockdown imposed to control the coronavirus contagion has created a cyclical crisis in the overall economy of the country, Nepali private sector has suggested the government to come up with fiscal stimulus package equivalent to 5 percent of the country’s GDP. In a joint memorandum presented by the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), Confederation of Nepalese Industries (CNI) and Nepal Chamber of Commerce (NCC), the three apex bodies of the private sector have urged the government to immediately announce the “Economic Recovery Package”. The suggestions are short term, midterm and long term proposals for economic revival. Besides policy reform, there are four sector-wise suggestions on monetary, labour, employment and electricity issues.

The list presented by the private sector organisations include a range of demands from setting up a re-financing fund of Rs 100 billion to allow business firms to suspend salary of workers in case of the extension of lockdown. They have asked the government to let industrial enterprises to pay workers a maximum of 50 percent in salaries for the lockdown period.  Similarly, the suggestions including reducing lending interest rate of banks by 5 percentage points for a period of at least three years. The private sector organisations have argued that it will take time for businesses to pre-lockdown stage even after the lockdown is lifted.

Demands of Private Sector on Sector Wise Basis:

  • Reduction of lending interest rate by 5 percentage points for three years
  • Setting up of Rs 100 billion re-financing fund
  • Extension of micro-inspection period of industries under loss by five years
  • Arrangement of supplementary loan expansion for good debtors in Monetary Policy
  •  Arrangement for a maximum of 50 percent in salary payment for lockdown period
  • Arrangement for suspending collective bargaining in enterprises-level
  • Arrangement for salary payment with equal contributions from employers, workers and the government
  • Special legal arrangement to permit any company and industrial enterprise to reduce their size, capacity or even cease their operations
  • Cancellation of electricity demand charge for four months
  •  20% discount on electricity tariff for 15 months

Deep Slump in Manufacturing

No matter what the government has said to facilitate the industrial sector during the lockdown, most of the manufacturing businesses have found themselves in a deep slump.

The Chaudhary Group’s decision to cease production of its popular Wai Wai brand of noodles in Nepal citing difficulties in sourcing raw materials is an example of the situation Nepali manufacturers are currently going through. Though it has been relatively easier for firms engaged in food processing and producers of items of daily needs as such companies have been categorised under ‘essential services’, other manufacturing businesses haven’t been as lucky.

Manufacturers of construction materials have registered record losses over the past month. Producers of steel and cement, who were already under pressure before the lockdown due to sluggish demand in the market, have seen demand for essential construction materials depleting to zero since the restrictions in movement of people were put into place on March 24.

According to Cement Manufacturers’ Association of Nepal (CMAN), the cumulative business loss of all cement producers has amounted to over Rs 22 billion in the five weeks of lockdown. Similarly, production and sales of steel have come to a grinding halt. Nepal’s steel industry, which has an estimated total investment of Rs 400 billion, provides employment to over 10,000 people.

The recently published National Accounts Statistics by the Central Bureau of Statistics (CBS) has estimated the manufacturing sector’s contribution to the country’s GDP at 5.09 percent in the nine months of the current fiscal year. According to the CBS report, the gross value addition (GVA) of the sector will be (-) 2.27 percent in FY2019/20 due to the disturbances in the supply chains and production related activities.

Halt in Infrastructure Development

The measures taken by the government to stop the spread of coronavirus has affected the infrastructure development across the country.While the works of the large development projects went on without much problems in the first 2-3 weeks of the lockdown, many projects are now reeling with shortage of construction materials and machinery as well as labourers. Completion of flagship development projects including Melamchi Drinking Water Supply, Mid-Hill Highway, Upper Tamakoshi, Gautam Buddha International Airport and Pokhara Regional International Airport have been delayed significantly. Construction works of several projects having Chinese involvement were already affected some four months ago when China reported the outbreak of the coronavirus and closed down the country.

The ongoing lockdown has hampered construction of hydropower projects rendering the government target to generate 1,000MW power by the end of the current fiscal year unachieavable. Speaking in a webinar organized by Nepal Engineers Association on April 30, Energy Secretary Dinesh Kumar Ghimire mentioned that only 300MW will be added to the national grid. “Even this will be achieavable only if the lockdown is not extended. Projects are reeling with severe shortages of construction materials and workers and the situation currently is beyond our control,” he said. Shailendra Guragain, president of Independent Power Producers Association of Nepal (IPPAN) said that nearly 90 percent of workers who were working in 120 hydropower projects being constructed across the country have left to their homes after the start of the lockdown. According to him, the current crisis has risked the underconstruction hydropower projects with Rs 600 billion in total investment.

Remittance at Risk

Remittance inflow, which has remained as the lifeblood of the Nepali economy for the last two decades, is poised to decline sharply due to the pandemic-induced economic crisis. There have been varying degress of forecasts related to the decrease in remittance inflow in Nepal. A report published by the World Bank has forecasted that remittance to Nepal will decline by 14 percent in FY2019/20 from USD 8.79 billion in 2019. The COVID-19 eruption is having a significant impact on the worldwide flow of remittance and remit-dependent countries like Nepal will be affected most economically, according to the World Bank. Nepal Rastra Bank (NRB) had earlier expected the remittance to grow by 5 percent this year to reach to USD 9 billion. Remittance as a percentage of the GDP is 29 percent in Nepal and a decline in remit income means a decrease in consumption, bank deposits and other key economic activities. Remit companies reported a drop of 50-60 percent in remittance inflow in the weeks following late March.

The major destinations for Nepali migrant workers including gulf countries, India, Malaysia, South Korea are mired in economic trouble. Similarly, other major remittance source countries for Nepal including Europe, United States and Australia are facing a similar situation. The situation in the gulf countries is worsening as the countries are facing a deeper economic slump due to the steepest drop in oil prices caused by the rivalry between OPEC and Russia and a historic fall in worldwide demand for oil brought about by the coronavirus outbreak. This has led to massive loss of jobs in services, retail and construction sectors where most Nepali migrant workers are employed. Currently, Nepal is under pressure to rescue tens of thousands of Nepalis stranded in countries including India, United Arab Emirates, Saudi Arabia and Qatar. Bringing large numbers of citizens from foreign lands and keeping them safely in quarantine facilities will be a strenuous task for a resource deprived country like Nepal. Equally difficult will be providing the returnees with employment opportunities after the situation returns to normalcy. It has been estimated that currently about one million Nepalis are looking to return to their home country after losing jobs abroad.

90% Plunge in Tourism Revenue

What was supposed to be a busy twelve months for the tourism sector in Nepal with the start of the Visit Nepal 2020 campaign has instead turned out be a disastrous year for civil aviation, hospitality and travel/trek businesses. Though the impact on the growth of Nepal’s overall tourism sector is yet to be seen, it has been estimated that cumulative losses will amount to over Rs 160 billion in 2020. This includes a loss of Rs 90 billion in the hotel and restaurant business, Rs 5 billion in domestic aviation and Rs 65 billion in travel/trek, mountaineering, rafting and adventure tourism.

Preliminary estimates clearly suggest a negative growth for the sector this year.  According to the National Accounts Stastistics published by the Central Bureau of Stastistics (CBS), arrival of tourists has slumped by (-)13.82 percent in the nine months of the current fiscal year compared to the same period last year. CBS has forecasted a negative growth of 16.30 percent for hotel and restaurant businesses.

Similarly, the Hotel Association Nepal (HAN), the umbrella organisation of Nepali hoteliers, in its latest report has projected a 90 percent drop in revenue of hotels in 2020. HAN has warned that hoteliers are facing a situation which is becoming worse than the conditions they faced during the height of the Maoist insurgency in the mid-2000s. “If the government fails to bring a rescue package for the sector, we fear that there will be a closure of hotels similar to what happened during 2003-2005 when the hotel industry’s income dipped by 50 percent,” stated the report. With the occupancy rate sliding to virtually zero in April, hoteliers have resorted to measures such as paycuts and unpaid leave.

A meeting of HAN organised recently decided to provide 12.5 percent of their basic salary to hotel staff. Because of the sharp decline in occupancy rates, hotels associated with HAN bore losses of over Rs 10 billion in revenue in the first four months of 2020. HAN has suggested the government to create a rescue fund of Rs 20 billion to stop hotels from closing permanently.

Likewise, a report prepared by a taskforce formed by the Ministry of Culture, Tourism and Civil Aviation has found that Nepali airline companies engaged in domestic air services, have incurred a loss totaling Rs 4 billion over the past month. According to the report, the mounting losses have put Rs 100 billion invested by the private aviation companies at risk.

Travel and tourism businesses have been the hardest hit by the COVID-19 pandemic the world over. According to the World Tourism Council, due to the outbreak of the virus all tourism destinations across the globe were closed down in April for the first time in history.

Stimulus Package of Rs 200 billion for Economic Revival: Report
Nepali economy is losing Rs 10 billion daily due to the nation-wide lockdown aimed at curbing the possible spread of coronavirus, a new study published by the Ganeshman Singh Academy has said. The report titled “Survival, Revival, and Beyond: Nepal's Strategy to Manage the Impact of COVID-19” has suggested the government to come up with a stimulus package of at least Rs 200 billion for the country’s economic recovery.

The study, conducted by a panel of 11 prominent economists and experts including four former vice chairpersons of the National Planning Commission, has found that the lockdown has done widespread economic and social damage and everyday life of people has been badly affected. “The government should begin planning to manage the arrival of up to 1.5 million migrant returnees in productive employment or viable social security schemes,” reads the report.   

The report has outlined priorities for the government in key areas of public policy to improve public health, re-orientation of public finances, economic revival and job creation.

It has suggested to revamp employment guarantee schemes to ensure minimal social security, and institute large-sale skill and vocational academies across the country to train young people guaranteeing jobs for 100 days. To address increasing vulnerability to transient income and health shocks, the report recommended providing relief in the form of cash or nutrition vouchers to vulnerable women and children through local governments. The report has also suggested reorienting public finance. “As the need for a proper economic stimulus package becomes more evident, Nepal must explore ‘additional’ funding by redirecting existing allocations, freeing up resources through efficiency and austerity, exploring new borrowing and partnerships,” the experts have said.

Similarly, the report recommended redirecting of budgetary allocations by pausing large infrastructure projects, consolidating local and provincial allocations, reviewing ministry-wise expenditure and forcing underspending ministries to surrender unspent amounts to reach out to the targeted people unable and provide relief packages directly. The report has stressed on the need to promote the adoption of the digital marketplace, including e-commerce and business process outsourcing. “E-banking and e-lending schemes should be encouraged, together with e-health and e-learning, including tracking of infections and advisory services. According to the report, internet service providers (ISPs) are heavily taxed (45 percent). “Therefore ISPs should be provided tax rebate for one year to widen access,” the report said.

Meanwhile, it has also highlighted on the need to support the expanded adoption of e-commerce, BPOs (software, animation), offline and online remittance, e-learning, e-health, e-banking, e-lending, ride shares and agri-tech. According to the report, many digital start-ups working in these areas are struggling at present and they need to be supported with a special programme. 

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