The Economics of Exiting from the Pandemic

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The Economics of Exiting from the Pandemic

The actions and policies adopted by the government will determine the fate of the country and most importantly the fate of the poorest of the poor people in the country.

--BY  BHOJ RAJ POUDEL

The lockdown has been unbearable for those who do not have a steady income in the formal sector of the economy. Almost 70 percent of the total workforce of working age group is in the informal sector of the economy.

Those workers in the informal sector are deprived of any kind of security such as insurance or unemployment schemes.

Although agriculture has a huge share in the country’s economy, many of these people do not have enough land for subsistence level of food production. Those who have gone back to their homes will also face challenges to feed their family.

Households that rely on remittance inflow are likely to face challenges as there will be a significant decrease in the inflow of remittances. World Bank has estimated that there will be a 22 percent decrease in remittance inflow in South Asia due to the impact of Covid-19. Such a huge fall in remittance inflow will cause a severe impact on the economy as well as in people’s lives as Nepal is the fourth top remittance recipient country after India, Pakistan and Bangladesh in the region. Nepal is also among the top five remittance recipient small economies in the world.

The World Food Programme (WFP) has warned that the global food insecurity will worsen as the number of food insecure people will double due to the pandemic. WFP estimations show that some 265 million people in low and middle-income countries will be in acute food insecurity by the end of 2020 unless swift action is taken. Around 30 districts in Nepal are under the threat of food insecurity already and with the Covid-19 the number will significantly increase. Since the government has not yet unrolled any plans to ensure the smooth supply of agricultural inputs required during the time of plantation, agriculture production is going to be disturbed pushing hundreds of thousands of farmers into the food deficit zone in the coming year as well.

Most of the challenges that the economy is facing result from the absolute slowdown of the economy’s engine forcing the entire workforce to stay idle. The government’s response to fight back the impact of the pandemic on the economy is haphazard as it does not have any principle behind it. Mobilization of fiscal and monetary tools to manage the economic fallout of the pandemic has been ineffective.

Most of the SMEs have been reeling under the pressure to either shut down or reduce operations due to the nationwide lockdown. But the government has not put much effort into finding ways to help them to sustain through this crisis.

SMEs have failed to manage their books but there is no window to breathe with the support of some kind of financial support from the government. There are clear indications that the SMEs will suffer the most, globally, due to the pandemic.

The International Monetary Fund (IMF) has put forward a recommendation to its member countries to establish a Special Purpose Vehicle (SPV) to help SMEs to sustain through this crisis. Governments can make an equity investment in their respective SPVs along with other agencies, which can be managed by the central bank of the country. One of the main types of support that these SPVs can extend to SMEs is to manage their working capital and payrolls.

The private sector can work to mobilize resources to contain the spread of the virus by working in tandem with the government. But beyond that, the private sector can also take the lead in terms of identifying modalities of continuing operations of their businesses during and after the crisis since business as usual will not be sustainable.

Nepal’s private sector, however, has stayed idle so far expecting the government to do everything. But this is not how the crisis can be managed. The challenges that the private sector is facing are enormous at the outset. But this crisis can also be exploited as an opportunity to venture into new businesses by utilising technological advancement.

Nepal is prone to the risk of not being able to welcome foreign direct investment (FDI) for next one or two years, which will put the private sector under more pressure to create jobs and fuel the economy. Meanwhile, the government can expedite the operations of public-private partnerships (PPP) modalities to fuel the economy and accelerate the pace of economic activities.

The economy is under multi-faceted pressures due to Covid-19 but the most critical task is to manage and run the state apparatus. The government’s revenue collection is not going to be anywhere close to the target for at least this fiscal year. This will have a critical impact on managing even the basic recurrent expenditure. The fall in revenue collection will continue if the remittance inflow goes down further.

A huge chunk of revenue comes from the import duty on consumer goods that come from India as well as other third countries. The irony here is that the government has not paid enough attention to help migrant workers to stay safe in the countries they are in. Most of the households that have their bread and butter spinner abroad for temporary jobs are already worrying about paying school tuition fees for their kids and affording health related expenses. That is where the economic impact will be transferred to the social sector. This will have far-reaching consequences in health and education in the society.

Nepal is one of those countries that has low capacity of job creation. There have been some preliminary assumptions that a huge number of migrant workers will be back in country once the lockdown is lifted. This will cause pressure on the jobs market as well as on the demand for social protection from the government. The government will feel more pressure to come up with a sound social security scheme for people working both in the formal and informal sectors. Since the government is already under the pressure of managing basic recurrent expenditure, it will face higher pressure in ensuring such funds to arrange a comprehensive social security scheme.

One of the possible options could be expanding the net of the Prime Minister’s Employment Program (PMEP) by including people from diverse sectors and regions to be part of it so that basic employment can be ensured. However, the government must focus on improving governance. This can come as some sort of relief to those who are seeing no hope on the horizon.

As we do not see an exit door from this crisis on the horizon, there should be some priorities set in order to fight against the fallout of the pandemic. Enhancing the health sector should be a priority. If there are not enough funds in the health sector, then the budget should be re-prioritised. Second, targeted support should be made to hardest-hit households by identifying them. The government should work on protecting people and their jobs. For that matter, the government should also support industries directly through both fiscal and monetary tools and policies, along with relaxing macro-prudential regulations in terms of regulating financial institutions from Nepal Rastra Bank (NRB) as well as easing financial stress of industries and SMEs.

We have already seen that the rich world is in the mood of adopting a “whatever it takes” principle to fight the economic fallout of the pandemic. Nepal also should follow a similar principle. Risk sharing with the private sector should be a focus. For that, the government must create a space for the private sector to join hands in order to create an environment where workers can go back to work and manage their basic expenses.

Against this backdrop, the central player in this situation is the state. People and the private sector will revolve around whatever policies are taken by the government in the coming days. Hence, the actions and policies adopted by the government will determine the fate of the country and most importantly the fate of the poorest of the poor people in the country.

However, the flip side of the coin is that the economy can recover soon if the government takes the right set of policies to protect people and support businesses. Nepal can make strides in terms of economic development seeing the curve of the spread of the virus so far across the country. This can be a time for the government to re-think on how to re-design how our institutions operate. Riding on the horse of federalism, the federal government can manage resources across the country and set-up foundations for basic institutional good governance through provincial and local governments for better public service delivery.

Let us hope that the pandemic will not take its deadliest path in the country and we will be able to exit from a less torturous door. This will give us tremendous confidence to march towards the future with higher hopes and a better vision. But this is the time to plan more than to stay hopeful about the future. The government, especially the Ministry of Finance (MOF) should design short, medium and long-term strategies to work towards the future considering the different scenarios. Nepal’s aim to become a mid-income country by 2030 can remain intact given that we work sincerely giving due attention to the environment, ecology and economic justice in the society.

Poudel is a Consultant Economist at Asian Development Bank.

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