Kamal Dev Bhattarai and Arun Poudel talk to economist Posh Raj Pandey, who is also the chairman of South Asia Watch on Trade, Economics and Environment (SAWTEE), about the impact of the global novel coronavirus outbreak on Nepal’s economy, with the focus on its impact on remittances.
How do you assess the impact of the coronavirus pandemic on the country’s economy?
Let’s first discuss the structure of our economy. The contribution of service sector in it is very high, which is mainly about people-to-people contact and movement. So, we see a higher impact of coronavirus in this sector. In manufacturing, there is comparably lesser impact but if there is a break in value-chains, it will also be affected. In our economy, the contribution of agriculture is about 27-28 percent, whereas the contribution of social and government service stands at around 4.5 percent. This means a third of the economy is insulated and would not be directly hit by coronavirus. There will be impact only in the remaining two-thirds.
How will the two-thirds of the economy that is vulnerable to coronavirus be affected?
There can be both direct and indirect, as well as positive and negative, impacts. The worrying factor is that the value-chain of the industrial sector is breaking down as we import intermediate and raw materials from other countries. This could result in less production and affect the country’s overall export. Similarly, the high flow of remittances boosts retail and wholesale trades. If remittances die down, health and education sectors could also be affected.
Next, the coronavirus scare is affecting our tourism. Basically, there are two components in tourism: hotels and restaurants, and travel and transport. These sectors are directly affected because movement of people is restricted. Similarly, there will be a direct impact in the construction sector. Big government projects will be hit.
What kind of positive economic impacts could the coronavirus pandemic have?
Due to the coronavirus outbreak, global oil price has come down. Despite some fluctuations, the price is on a downward trend. It would benefit our economy as we import a lot of oil. Similarly, concentration of our raw material resources in China was never a good thing. The world might now think of diversifying on raw materials and intermediate or final products. If the private sector and the government can come up with a calculated strategy, it also gives us an opportunity. On the negative site, as I said earlier, there is going to be a huge impact on remittance sector.
Remittances are considered the backbone of the Nepali economy. Will they be severely reduced?
The infection is spreading fast in Gulf countries and Malaysia, Nepal’s major labor destinations. Some countries have already blocked the entry of Nepali workers. Even India has said it will require Nepali travelers to be tested at the airport. This will restrict the flow of migrant workers as these countries are providing jobs to our unemployed people. Second, the remittances that Nepali workers send home have helped generate income and boost the economy. Remittances constitute one fourth of the country’s GDP, and if there are any ups and downs, our economy will be directly affected. Additionally, if economic activities slow down in those labor destination countries, they will ask for fewer workers. It will not only impact new recruitments, but also displace current workers. Can we generate employment at home for all those people?
Is there a way out of this potential economic crisis?
We are more or less without options. We have long been saying that sending workers abroad is only a transitional measure. And yet the government has been promoting it. We will not be able to manage the workforce if our workers return from those countries. We will be option-less because we cannot generate enough jobs for them at home. But even if we create some jobs, we cannot give the returning workers the wages they expect.
What could be the political and social fallouts of that?
Obviously, there would be big social and political impacts. It could result in political instability. There are also chances of social unrest and increase of crimes. It could also affect our social stability.
Will the national economy collapse if remittances stop coming, as some fear?
We have adopted flawed parameters of economic success. For example, the success of the finance minister is measured on the basis of the revenue and foreign aid he helps generate. It should rather be measured on how the money is spent. The finance minister takes pride in the revenue generated
but nobody cares where the revenue comes from. In the past decade, 47 to 58 percent of the revenue was collected from customs, which is import-based. Remittance money created demand here but we do not have enough supply. So the country had to import more, which in turn raised more revenue. So, more the remittances, more the imports and greater the revenue.
If the finance minister’s success were measured in terms of revenue from excise duty, which means more tax on goods produced at home, it would be better. Right now, the finance minister is complacent. The government thinks it need not work with the private sector. Even the Nepal Rastra Bank governor is happy because foreign reserves are in a healthy state due to remittances. Nobody cares about the huge import-export gap. Earlier, there was equilibrium between the country’s trade balance and inflow of remittances. So in a way the trade imbalance was compensated by remittances. In the past 3-4 years, the situation has worsened. Remittances have failed to make up for the deficit.
Does it mean remittances are decreasing or is the trade imbalance swelling?
The size of trade deficit has increased. Over the years, the gap between trade imbalance and remittances has continued to increase. Even in current circumstances, pressure is gradually building and remittances are not going to sustain the demand for foreign exchange. So, if remittances go down, we have to take foreign aid even to buy medicine, gasoline and food grains. Our economy will be captive to international financial institutions.
Compared to other countries in the region how dependent are we on remittances?
Obviously, India and Bangladesh get far more remittances than us. But in relation to the share of remittance to the country’s economy, we stand in the top three position globally. Except for some central Asian countries that send migrant workers to Russia, Nepal has the highest dependency on remittances. So we are in a very vulnerable situation. Regionally, we are the most vulnerable. When we talk about India, lower remittances will only have a local and limited impact. For example, it could affect the state of Kerela, not Delhi or other states. In our case, the whole economy will be affected. In Bangladesh, remittance contributes to just 5-6 percent to the national economy; in our case it was 25 percent last year.
What happens if we cannot find an alternative to remittance?
If we do not seek options immediately, our economy could crumble anytime.