How the pandemic wrecked the national economy

Rudra Pangeni

Rudra Pangeni

How the pandemic wrecked the national economy

The economy was only just starting to peak steam after the 2015 earthquakes and the subsequent border blockade. It grew at close to seven percent before it was battered again by the Covid-19 pandemic. Recovery will be a long and tough road

The economy fared impressively for three consecutive years following the earthquake and Indian blockade in 2015-16, with around seven percent growth rates.

The spurt was the result of different factors, some of them natural, others related to long-needed reforms. Electricity supply had improved, and construction-related industries were flooded with demand as well as investment in post-earthquake reconstruction. Plus, a stable investment climate had been created after the communist coalition’s near two-thirds majority in the 2017 elections.

The newly elected local governments received a significant chunk of the budget from the federal government and the money they spent had an impact across the country. 

In the fiscal year 2018-19, a robust harvest was recorded owing to a favorable monsoon, and agriculture output grew by a record 5.16 percent. The construction sector grew by 7.8 percent. Improvements in service delivery at local level and more foreign investment sustained growth. 

Buoyed by the overall positive outlook, then Finance Minister Yubaraj Khatiwada set an 8 percent growth target for 2019-20. His target was also attributed to the likely completion of two mega projects—the Upper Tamakoshi hydropower project and the Melamchi Drinking Water Project—announced in that year’s budget.

MelamchiPresident Bidhya Devi Bhandari inaugurating the distribution of Melamchi Drinking Water project at Bhrikutimandap | Sunita Dangol

In February 2020, the mid-term budget evaluation projected agriculture output growth of 2.23 percent—lower than the previous year’s. The two game-changer projects were also not ready by the year-end. Bilateral development partners such as the World Bank and IMF and ABD now projected Nepal’s growth to hover around five percent.

The projections came as the government's capital spending, which drives private sector investments, and foreign investment inflow, also slowed. But Minister Khatiwada was steadfast on his projection. 

The government needed a strong base for economic growth and important projects such as Melamchi and Upper Tamakoshi had to come online for this, says economist Chandramani Adhikari. “But none of the projects that could help sustain high growth were ready,” he says.  

Then came covid

This was the country’s economic scenario when Covid-19 hit in March 2020. The government’s overall spending, heavily concentrated between March and mid-July, was yet to gain speed. “The government’s slow spending till mid-July also contributed to the economy’s shrinkage,” adds Adhikari. 

A nationwide Covid-19 lockdown stopped the economy in its tracks. International borders were sealed and trade froze. Tens of thousands of migrant workers, who walked hundreds of kilometers from Indian cities to get home, were stopped at the border. With a ban on international flights, the mega-program of bringing two million tourists in 2020 was shelved. 

“The government neither worked on keeping feasible industries open nor did it do much to check the inflow of infections from migrant workers in India,” Adhikari says. 

The government diverted Rs 136 billion from its budget to fight Covid-19. Some industries opened with the lockdown’s relaxation in June, but limited testing hindered economic activities. Those with limited means such as daily wage earners were left to fend for themselves. The economy shrank by 2.01 percent.

In mid-May last year, then Finance Minister Yubaraj Khatiwada had tabled a Rs 1.47 trillion budget focusing on health facilities and Covid-19 response. A financial package worth Rs 150 billion (around 4 percent of GDP) was set aside to offset the negative impact of Covid-19 and subsequent lockdowns. 

Minister Khatiwada vowed that new jobs would be created as thousands of returning migrant workers were expected to take to agriculture. Also, “food-for-work programs in infrastructure projects will help create jobs,” he had said. 

The government, however, did not even assess the damage Covid-19 wreaked “on hundreds of new enterprises set up by the young generation”, says Pashupati Murarka, ex-president of Federation of Nepalese Chambers of Commerce and Industry. Nonetheless, a purse of Rs 83 billion for refinancing at 5 percent interest was available for enterprises that had borrowed from the banks.

But losses in tourism, recreation, aviation, transport, and service industries were huge and the government response was paltry, according to economists and members of the business community. 

“It didn’t even offer relief materials for the most vulnerable wage-earners and also ignored protests by youths demanding PCR tests and health services,” says economist Keshav Acharya. 

Remittance cushion

Despite the announcement of plans by all three tiers of the government to provide jobs to returnees and engage them in agriculture, migrant returnees, still jobless, started going back in hordes to India in October. 

The government could only rescue a few hundred migrant workers who had lost their jobs due to the Covid outbreak in the Middle East and Malaysia. Economists feared a reduction in remittance inflow; instead it has steadily grown since last June. Economies in Malaysia and the Middle East bounced back quicker than expected and the migrant workers this time chose to send money via formal channels, according to the World Bank. The government was cushioned by foreign currency received via remittances even when tourism collapsed.  

The health sector nearly collapsed. Wrote another economist Chandan Sapkota in an article for The Kathmandu Post, “This time, in addition to weak economic fundamentals and unrealized political and peace dividends, the inadequate infrastructure provision and a collapsed healthcare sector have laid bare economic and social vulnerabilities.” 

Poor implementation of the health budget crippled the health sector. But after five months of the fiscal, the government went on a nationwide foundation-stone laying spree for 5-15 bed hospitals at the local level. But real work on them was yet to begin at April-end, when the second lockdown began. A total of Rs 115.06 billion (7 percent of total budget) was allotted for the health sector, according to budget documents. 

But information provided by the Financial Comptroller General Office to ApEx shows that such allocation was only Rs 66.03 billion, including Rs 7 billion given to different ministries to fight the pandemic. Only Rs 26.98 billion (about 40 percent) of the budget was spent by mid-May.

Observers are worried the remaining 60 percent of the budget may remain unspent by the end of fiscal (mid-July) even as people struggle to access health services in remote areas. Death rates have spiked alarmingly in the second and third weeks of May due to shortage of oxygen cylinders and hospital beds. 

Farmers faced an acute shortage of chemical fertilizers during the paddy and wheat seasons, from June to November. Owing to the shortage, the projected 2.64 percent agriculture growth by the Central Bureau of Statistics will most likely be missed. So growth this year will be more or less the same as last year, economists reckon. 

Beware another wave

Now most of the country is under a second set of lockdowns and there is no indication of the economy’s reopening. No one knows when a significant proportion of the population will be vaccinated and allowed to return to work.

In his budget speech for the new fiscal, Finance Minister Bishnu Prasad Paudel acknowledged that achieving 4.01 percent project growth for this fiscal would be challenging in the middle of the pandemic.

Even in this bleak scenario, Nepal Stock Exchange has been on a bullish run, climbing to a new record of 2,800 points this June. Economists say the market’s trend does not mirror the reality of Covid economy and needs to be monitored properly. 

When covid cases declined in January, interested foreign mountaineers flew to Nepal and headed to the base camp to scale Mt Everest. The relaunch of mountaineering had rekindled the hope of a bounce-back in tourism, but the hope was short-lived. 

There is also fear of another wave. On May 25, Dr Sudhamshu KC of Bir Hospital tweeted, “We could not save lives because of mismanagement, we need to be better prepared for a possible third wave of Covid 19.” But the prime minister’s address to the nation and the finance minister’s subsequent budget speech were both silent on the third wave. 

Budget goodies

On May 29, Finance Minister Bishnu Prasad Paudel presented a budget of Rs 1.647 trillion for the next fiscal aiming for 6.5 percent growth. The budget focuses on health, with an allotment of Rs 122.77 billion for the Ministry of Health and various schemes to help the economy recover from the pandemic. The government expects the economy to bounce back soon after the majority of the people are vaccinated. Rs 26.75 billion have been allotted for vaccines in the next year’s budget while another Rs 37.5 billion will be spent on Covid tests and treatment. 

BudgetFinance Minister Bishnu Prasad Paudel walking towards the rostrum to deliver budget speech of fiscal year 2021/22

The budget waived 90 percent income tax of firms with annual transactions worth under Rs 2 million; and it waived 75 percent and 50 percent for firms with transactions ranging from Rs 2 to 5 million and Rs 5 to 10 million respectively. 

Likewise, income tax for hotel, travel, trekking, transportation, aviation, film industry and media has been lowered to 1 percent and these industries also can carry forward Covid-time losses for next ten years for taxation purposes. The private sector has welcomed these packages to revive the ailing economy.  

The budget also provides concessions for startups. They will get a loan of up to Rs 2.5 million as seed money at one percent interest and income tax waiver for five years. 

Lease fees for industries based in Special Economic Zones have been lowered while they, mainly established for exports, will also be allowed to sell 40 percent of their products in local markets for the next three years. The government will reimburse 75 percent of the cost of building access roads and transmission lines for new star hotels as well as cement and iron factories if the industries build them on their own. 

But the private sector is also concerned about the government’s slow progress in vaccine import. “Vaccinating people from the private sector is important to bring them back to work, helping achieve the growth target for the next fiscal year,” FNCCI said in a post-budget statement. 

Cost of jabs

Vaccination for eligible people should be the top priority to stem daily economic losses worth billions of rupees, say both doctors and economists. “If we want to bring the economy back on track, we first need to bring people out of their homes. This will only be possible when we vaccinate the eligible population,” says Dr KC. 

But the government plan of purchasing five million doses of the Covishield vaccine from Serum Institute India has failed and the whole episode was riddled with corruption. 

ApEx calculates the cost of importing the required 40 million jabs at around US $220 million (nearly Rs 25 billion), going by the $5.5 per dose price quoted by the Serum Institute. 

“People from developed countries may soon be interested in travelling to Nepal as tourists. But they won’t come if we have not vaccinated our people,” says Dr Sushil Koirala, chairman of the National Dental Hospital. Travel and tourism contributes 7.9 percent to the GDP and provides jobs to over a million people directly or indirectly. 

Economist Keshav Acharya agrees with Dr KC and says that the government should keep its citizens first. Acharya says, “Investing a few billions on vaccination would be wise, even if we have to pay a little more for it. This investment could eventually save tens of billions of rupees for the economy.”