Restarting our economy needs thoughtful policy choices

Published On: May 11, 2020 10:20 AM NPT By: Lokesh Todi

Lokesh Todi

Lokesh Todi

Todi is a director of Reliance Group Nepal, where he oversees the operations of Yeti Polychem and Yeti Carpet.

As the COVID-19 pandemic begins to form our ideas of a new normal, a daily topic of discussion in most households revolves around speculating about the shape and future of the economy. Theories are rife and forecasting models are being created and shattered on a daily basis, but the fact remains that the world has never witnessed such an unprecedented economic upheaval and therefore there is no accurate way of predicting how the world economies will evolve post-COVID-19.

Since the lockdown measures were instituted on March 24 in Nepal, our economy has been at a virtual standstill. Countries around the world are restarting their economies, and Nepal too is attempting to calibrate its strategy to kickstart the economic machinery. However, any recalibration for the future necessitates an understanding of the country's current economic position. 

Nepal currently has a foreign reserves of Rs. 1,136.5 billion, sufficient to pay for 8.8 months of imports of goods and services. Even though Nepal was net importer of both goods (USD 7.25 billion) and services (USD 45.31 million) in the first eight months of this fiscal year, Nepal’s balance payment was still a net positive (USD 8.1 million), primarily because of the inflow of dollars from remittance (USD 5.198 billion), foreign direct investment (USD 137 million), and foreign grants, loans, and deposits (USD 871 million). Nepal’s GDP was on track to have a real GDP growth of around 6%, which has since been revised down to 1.5 to 2.8% by the World Bank and to 2.27% by the Central Bureau of Statistics (CBS).  

There is no question that Nepal’s remittances, which accounts for 55% of Nepal’s foreign dollar inflow, will be hard hit. A report by the World Bank and KNOMAD in April 2020 forecasts that Nepal’s remittance will drop by 14% in 2020 because of the pandemic. A drop in Nepal’s remittances is bound to put pressure on Nepal’s foreign reserves, some of which will be counteracted by a decrease in our import of goods and services owing to the decreasing consumption as well as a steep drop in oil price (which accounts for 14% of Nepal’s import). Furthermore, the government can maintain its dollar reserve by limiting imports of luxury non-essential items or increasing tariff on items to induce a decrease in their consumption. 

The bigger impact of remittance falling will be the layoff of Nepali migrant workers. Five countries (UAE, Saudi Arabia, Malaysia, Qatar, and Kuwait) account for 87% of Nepal’s migrant workers. Nepali workers in these countries are primarily in four sectors: oil and gas, services, manufacturing, and construction. A drop in oil price and closure of oil and gas fields, a drop in tourism and postponement of the World Expo 2020 in UAE, near completion of major construction projects in Qatar for 2022 World Cup, will result in a significant number of migrant workers losing their jobs overseas and returning to Nepal. Nepal’s government will have to proactively find ways of assimilating these returning migrant workers into our economy.

One way to do so could be by setting up a job bank and matching the skill of the returning migrant workers with vacant jobs in government infrastructure projects. For instance, many migrant workers from the construction sector could immediately be used on various national-pride infrastructure projects. This is a win-win situation, unemployed migrant workers will be able to get good paying jobs and the government of Nepal will be able to find skilled labor who can accelerate the completion of infrastructure projects. 

According to the  GDP growth revision of  April 29, 2020 by the Central Bureau of Statistics, five out of the fifteen industry classifications used to measure Nepal GDP will have negative growth this fiscal year: hotels and restaurants (-16.30%), transport, storage and communications (-2.45%), manufacturing(-2.27%), mining(-0.69%), and construction (-0.31%).

The hotel and restaurant sector will be most impacted because of COVID-19. Flight restrictions placed by Nepal and various other governments will curtail demand for incoming international tourists.  Hotel Association of Nepal (HAN) has already declared that all its member hotels will be shut till mid-November. Restaurants will have to find a way to generate income via home delivery models as social distancing requirements will curtail the maximum occupancy of sit-in customers. The hotel and restaurant industry accounts for 5.2 percent of Nepal’s total employment and 4.4% of the total outstanding loans by banks and financial institutions. There will be massive unemployment created due to furloughing or retrenching of the employees in this sector. 

Many tourism entrepreneurs have spent a lot of money to make Visit Nepal 2020 project a success. To leave these entrepreneurs now to fend for themselves will be a mistake. The hospitality industry has always been critical to Nepal’s economy and will be so in the future as well. During this difficult  time, it needs the government's help to pay and retain its employees and refinance its loans. The government needs to ensure that the hospitality industry can sustain itself so when tourism rebounds, it is ready to accept visitors and offer the hospitality that Nepal is known for. 

The manufacturing industry accounts for 15.1% of the workforce of Nepal. COVID-19 will increase the stress to the manufacturing industry, which already faces stiff competition from imported goods. The government can protect the local manufacturing industries by increasing tariffs on imported goods that are also manufactured in Nepal. The government must also incentivize Nepali manufacturers to export their goods. Nepali industries have to be offered competitive advantage over its neighbors in the form of cheaper electricity, immediate 100% duty drawback on raw material used for exported goods, tax exemption on exported goods, and more stable economic and labor policies which can attract foreign direct investments. Nepal needs to reduce its trade deficit if it is going to be less reliant on remittance to keep a healthy foreign reserve.

Furthermore, the government should actively come up with policies to make Nepal self-dependent on rice and vegetables. In the first eight months of this fiscal year Nepal imported Rs. 21.19 billion of rice (2.3 % of all imports) and Rs. 9.08 billion of vegetables (1% of all imports). Reducing Nepal’s food reliance from other countries is important and a right mixture of subsidy, tax incentives, and tariff is important to achieve this goal. Deployment of foreign technical assistance and grants in this sector will also be beneficial.

To revive the economy, all stakeholders in Nepal will need to share the burden equally. The economy is heavily interlinked, and when a sector fails, it will have a ripple effect. The overwhelming relief policies announced by the government puts a significant burden on the banks. The fact is that a healthy financial sector is vital for a growing economy and asking the banks alone to provide relief without helping them lower their cost of funds or mitigate their non-performing loan risk is not an optimal strategy. 

To decrease the cost of funds for the banks, the government could mandate banks to decrease the interest rates to all institutional fixed deposits (~45% of all fixed deposits in banks) by 2% and require all public and private institutions to invest a certain percentage of their portfolio in these low deposit accounts. Furthermore, the government can use its treasury surplus to guarantee a percentage of certain loans, especially of small SMEs who make up a big portion of our economy and they are the ones likely to be impacted most adversely. 

Unfortunately, the government is not able to offer massive stimulus packages to its public. The government revenue projection for this fiscal year was Rs. 1,039 billion and an expenditure of 1,365 billion, accounting for a budget deficit of Rs. 325 billion, which would be financed by external and internal debt. VAT, excise tax, import duties, and corporate and individual tax, the main drivers of government revenue, will be impacted by COVID-19 as consumption and profit decline. The government will thus have to increase its debt to finance its budgeted expenditure. Fortunately, Nepal’s debt to GDP ratio is a healthy 30.1% - the weighted average debt/GDP ratio of SAARC nations is 64%.

ADB and IDA account for 85% of Nepal’s total external debt. Both these agencies have announced additional loans for Nepal at low interest rates and have also agreed to push back principal payments. Furthermore, Nepal has the option to seek aid and line of credits from historic bilateral aid providers such as Japan, India, and China. Nepal should avail of additional debts to finance projects which will face revenue shortfall.

During times when government revenue is drying up, there is a tendency by governments to launch austerity measures. Austerity measures such as freezing government salary increases and wasteful spending makes sense, however it is not the right strategy when it involves cutting government capital spending, which helps spur economic growth. Capital expenditures are vital for Nepal to improve its ailing, and in places, non-existent infrastructure. Infrastructure projects have several benefits, from increasing labor productivity, boosting tourism, and increasing efficiency in transport (leading to lower petroleum products bills). 

The COVID-19 also gives the government the perfect opportunity to implement the recommendation of the “Public Expenditure Review Commission headed by Dr. Khanal, which has made suggestions to the government regarding the best way to allocate government spending and cut programs that are no longer useful. There is probably no better time to carefully cut wasteful spending, and the government should not lose this golden opportunity to make cuts which would have not been politically palatable during normal times.

The government needs to use independent economists, statisticians, and data scientists to help them come up with policy frameworks which will help the economy grow. Various trade groups will have demands, not all which can be implemented by the government. However, using data to guide their decisions and policy framework will allow politicians to be more effective in deciding how to revive the economy. 

The next couple of years will perhaps be the most challenging years for the economy. If we are to not just survive but flourish in the post-covid landscape, the private, non-profit, and government sectors must work together and trust each other. Without a feeling of shared responsibility, the prospect of our recovery looks grim. 

Todi is a director of Reliance Group Nepal, where he oversees the operations of Yeti Polychem and Yeti Carpet.


Leave A Comment