After a Year of Disappointments

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After a Year of Disappointments

Considering the traffic on the roads, teeming marketplaces and crowds in bhattis, normalcy appears to have been restored in Nepal. But not everything is honky-dory.


'Covid? What covid?' This is how most Nepalis appear to be reacting to the pandemic, considering the traffic on the road, teeming marketplaces, and crowds in bhattis (watering holes).

The threat of the disease is still there and the government recently confirmed that a new strain of coronavirus that originated in the UK has arrived in Nepal. This strain of virus is said to be much more infectious. But Nepalis no longer have the patience to confine themselves to their homes. They have started visiting malls, restaurants and even nightclubs. Schools have started asking students to return back to classes. And domestic tourists are out and about.

As people are venturing out, consumer spending is gradually picking up. This spending is expected to continue growing, as remittance inflow has remained robust so far. Remittance, which as a percentage of GDP stands at around 25 percent of the country's gross domestic product, offers a lifeline to most of the households in Nepal, enabling people to pay for their purchases. This consumer demand creates business opportunities for producers and traders, helping to grease the wheels of the economy.

The steady flow of remittance has taken many by surprise, as reports about job losses in Gulf countries and Malaysia—the major labour destinations for Nepalis—at the outset of the pandemic had fuelled speculation that the country's major source of foreign income would take a jolt. Just like what had been predicted, Nepal's remittance income plunged to an 86-month low of Rs 34.5 billion in April as lockdowns became ubiquitous across the world. But the inflow made a surprising recovery in a short period of time, hitting an all-time high of Rs 100.2 billion in July. Since August, monthly remittance inflow has averaged Rs 83.3 billion per month—higher than the monthly average of Rs 74 billion in the pre-pandemic period. This has stoked optimism about the economy's early recovery.

Yet not everything is honky-dory.

The good news for now is that 54 percent of the enterprises have resumed full operation, as against four percent in mid-July, according to a survey recently carried out by the central bank among 674 enterprises in 52 districts. Another 37 percent of enterprises have started partial operation with nine percent of the enterprises yet to kick off their production.

But what is worrying is that these enterprises are generating half the output than in the pre-pandemic period. These enterprises have also not been able to put 13 percent of the human resources in the payroll back to work, said the survey report. Worse, medium enterprises, which include hotels, appear to have slashed more jobs since mid-July, as they have currently put 71.5 percent of employees to work as against 83.1 percent in mid-July.

What is not known is whether the employed people are getting salaries of the pre-pandemic level. If they are not, those labeled 'employed' may have been looking for jobs elsewhere.

To protect both jobs and enterprises, the government, in November, introduced the 'Business Continuity Loan Scheme', under which credit of up to Rs 100 million was pledged for a minimum of two years at five percent (first year) to six percent (second year) interest. Although the stimulus package came too late, the business community initially welcomed it, as it allowed enterprises to use half of the loan to pay staff salaries and the other half as working capital. But when it was known that enterprises that had obtained loans at subsidised interest rates from banking institutions, government agencies and donors would not be eligible for the stimulus package, the enthusiasm in the business community dissipated. Later, hotels, the worst hit sector, complained that the package was introduced after they had shut down their businesses following travel restrictions. Today, there are very few takers of the loan, according to banks. So, the stimulus package that was intended to save jobs failed to yield the desired results.

The Covid-19 pandemic is projected to have culled about 1.6 million jobs in Nepal. The loss of such a large number of jobs has turned a bad situation into something worse, as the creation of employment opportunities was a major problem even before the pandemic hit the country. The majority of around 500,000 workers who join the labour market every year are forced to seek employment opportunities abroad because they cannot find jobs here. State-owned Nepal Railways Company recently provided a snapshot of how deep the problem of joblessness is when it announced vacancies for 129 posts but ended up receiving applications from over 32,000 job aspirants.

In times of crisis like this, the government should have ramped up its capital spending to create employment opportunities, especially in the construction sector that absorbs unskilled and semi-skilled workers. But it was able to spend only 14 percent of the capital budget in the first half of the current fiscal year, thanks to the feud in the ruling party, which appears to have diverted the attention of the prime minister and senior ministers from socio-economic issues. So, it is not surprising to see Nepalis waiting in serpentine queues along the southern border to enter India to find jobs, while 72,000 additional Nepalis left for other labour destinations, mostly in the Gulf, in the first half of this fiscal year.

Income losses, triggered by longer unemployment or underemployment spells, is likely to have a crippling effect on the fight against absolute poverty, as an estimated 1.2 million Nepalis have already slipped back into the trap of poverty. A jump in the poverty rate is likely to leave lasting scars in the social sector, such as health and education.

Over the years, Nepal has made great progress in reducing malnutrition and stunting rates among children. Those rates are expected to go up in the coming days, making children susceptible to diseases, while limiting their cognitive development and learning potential. The failure to address malnutrition triggers losses of up to three percent of the gross domestic product, according to the United Nations.

Similar losses are expected in the education sector as well. The pandemic has disrupted the education of around nine million students in Nepal due to the nationwide shutdown of schools. Many of these students could not join online classes, as they cannot afford internet service and devices such as smartphones or computers. Yes, internet penetration has reached 80 percent, largely because of mobile broadband, but it is still expensive based on income levels. If students continue to miss classes, dropout rates are likely to go up, hitting human capital formation, which will increase disparities. On a global level, an additional year of schooling is associated with a 10 percent increase in wages, according to a latest World Bank report.

The pandemic is, thus, amplifying Nepal's pre-existing vulnerabilities and adding new challenges to sustaining hard-earned progress, says the latest Human Development Report, adding, the crisis could derail Nepal's plan to graduate to the league of developing nations by 2024.

The only cure to these ills is widespread availability of Covid vaccines. But according to a projection made by the Economist Intelligence Unit, Nepal will gain access to large quantities of vaccines only in between April 2022 and 2023.

This means the tourism sector is likely to suffer for a prolonged period, as international travellers will not feel safe to visit a destination where there is a looming threat of getting the infection. This does not bode well for the sector, which employs over one million people and saw its income plunge 93.5 percent to Rs 2.3 billion in the first five months of the current fiscal year.

A slump in tourism income coupled with the expected fall in foreign direct investment, because of the dent in investor confidence, is likely to hit the country's current account and foreign exchange reserves.

Nepal's current account—which is basically the difference between earnings made from exports and imports of goods and services—slipped into the negative territory in December for the first time this fiscal year. This caused foreign exchange reserves to shrink to USD 12.5 billion in December from an all-time high of USD 12.7 billion in November. Foreign exchange reserves have started to feel the heat largely because of a rise in merchandise imports than in previous months. Merchandise imports are lately growing because of the resumption in the operation of manufacturing units and improvement in consumer demand. Along with imports, merchandise exports are growing too, but the revenue that Nepal generates by selling goods abroad is modest. This is the reason why Nepal books a trade deficit equivalent to 40 percent of the GDP.

If Nepal's external sector starts feeling the heat, banks that are currently flush with liquidity may face cash flow problems. This will eventually push up lending rates, sounding a death knell for enterprises trying to make a recovery. This will not only hit the job market, but the entire GDP, which, according to the World Bank, is expected to have expanded by 0.2 percent in the last fiscal year and is projected to grow by 0.6 percent in the current fiscal year.

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