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Impacts of Covid-19 On the Nepalese Economy | A story of how this may all play out

Nepal had its first Corona Virus or COVID-19 case confirmed on January 24, and so far, the increase in confirmed cases has not been significant compared to other neighboring countries (9 Cases as of April 7, 2020). Our Government has enforced a nation-wide lockdown and has issued guidance to practice social distancing, while many companies have enabled employees to work from home in an effort to flatten the curve.

During this period, the Nepalese economy is at a standstill, and it seems inevitable that the coronavirus pandemic will lead to a global economic recession. A global recession of this magnitude will end up impacting the country even if we are not yet affected by the pandemic directly.

Let’s look at how this pandemic will impact Nepal in the coming years :

Impact of COVID-19 on Travel, Tourism and Service Sectors

After Declaring 2020 as Visit Nepal Year, our Government expected 2 million people to visit Nepal this year. Unfortunately, however, Nepal is facing a massive setback as a result of this pandemic. Retail trade, leisure, hospitality, recreation, and transportation services are hit the hardest, and until a vaccine is procured, travelers will feel unsafe, which will hurt the tourism sector even more.

There was an 80% decrease in visitors from China as of February. Trekking and mountaineering expeditions have gone ahead, but there has been a 50% decline in the number of clients. There are also reports of cancellations for April. “Hotel bookings are down by 60% in the 5-star hotels around Nepal,” Shreejana Rana, President of Hotel Association of Nepal. And similar is the case with other hotels with a drop of 40-45% and more.

Official figures are not yet available for March and April, but the travel industry is reporting widespread cancellations. Tourism accounts for around 8% of the Nepalese economy as of 2018, according to the report prepared by the World Travel and Tourism Council.

This will mean that many businesses relating to the tourism sector may be forced to shut down which will further increase unemployment as The cancellation of visas and mountaineering expeditions is expected to put around 20,000 tours, trekking and mountain guides out of job.

Impact of COVID-19 on Inflation

As central banks and governments across the developed world start pumping money (Printing Money) into their economies, a rapid rise of inflation is inevitable throughout the globe. As inflation increases it will largely hurt the lower-income families as their purchasing power will be sufficiently reduced.

Despite the Government’s target to control inflation at a maximum of 6%, the average rate of inflation has already surpassed the target and has reached 6.82% as of mid-January 2020. This is due to the rapid increase in demand for consumable goods. This rate is likely to increase rapidly in the near future and may reach upwards of 9-10% if we are lucky.

To visualize this, imagine that the price of a liter of milk that used to cost 100 Rs suddenly jumping to 110 Rs in a matter of weeks. Rise in prices over a long period is often offset by the increase in household income. But with no income (no jobs) and a high rate of demand, a rapid rise in the price of consumable goods (Oil, Milk, Food e.t.c.) will disproportionately impact lower-income families.

It also does not help that People at this time without jobs are taking in more debt to sustain themselves.

Impact of COVID-19 on Remittance

Nepali officials and all the stakeholders have been saying that more than 4.5 million Nepali people are working as migrant workers based on the work permits issued. In reality, however, there is no substantial data on the number of Nepalis currently working in labor destination countries like Saudi, Dubai, Qatar e.t.c.

According to Foreign Employment Department data, it has issued nearly 6.3 million labor permits—a government permit required before going on foreign employment—since April 29, 2000.

Although the numbers are not clear we can assume that due to the massive spike in unemployment numbers in foreign countries, many Nepalese workers are unable to earn. Nepalese immigrants not being able to work has already caused Remittance to come into the country to dry up drastically. This is problematic because Remittance accounts for around 26% of the Nepalese economy as of 2019.

During the last fiscal year, the country received Rs879 billion in remittances (around 25 percent equivalent of the Rs3.46 trillion-worth gross domestic product) from workers abroad, according to the central bank. Until January 20, 2020, Rs 376.99 Billion has come into the country in the form of Remittance alone.

With Remittance drying up, families who rely on it to sustain their lives will be unable to do so, forcing them to take on more debt or sell their assets (Stocks, Houses, e.t.c).

Impact of COVID-19 on the Stock Market and Asset Prices

Highest Nepse of 2020
Nepse 2

In Nepal, the secondary market had just had a bullish run before the spread COVID-19. The month of February saw a big bull run. A steep rise in the index from 1,100-ish to 1,600+ (a gain of 500 points) within a span of three months was begging for a correction. The correction did happen but at a time when the virus was starting to spread all around the globe. This created more panic in which multiple circuit breakers (Halts in trading due to massive losses in a short period of time) were triggered on March 10. The confidence in the market dwindled and with no real online trading system, the market had to be closed indefinitely on March 22, 2020. During the panic, the market lost 381 points in a matter of 24 days.

With debt being an issue it is almost a certainty that consumer spending will slow down drastically. This will result in a drop in investments along with a fall in commodity(Land, Stock e.t.c) prices. This means the stock market is likely to collapse and with this, the real estate market might collapse as well. The real estate bubble in Nepal has always been fueled by migrant workers using the money they earned from foreign countries to buy Lands and Houses. After this pandemic, there is a large possibility of a cash crunch leading companies and people to liquidate their assets in order to sustain themselves and pay off loans.

This is problematic because, as asset prices start decreasing so will people’s ability to borrow money (Lack of collateral). This could be a good opportunity for aspiring investors and people with a lot of savings at hand.

Impact of COVID-19 on the Businesses and Employment

Asian Development Bank (ADB) has predicted that Nepal will have to bear a 36.78 million dollar loss to the global outbreak of Coronavirus – with 15,880 job cuts depending on how the virus evolves.

This is why a lot of companies are likely to go bankrupt straight out this pandemic if no relief is provided by the Government. We must try and follow in the footsteps of other governments. Such as the Danish Government, which has assured its employers that it would cover75 percent of employee’s salaries if they promise not to cut staff. Or, the Canadian Government, which has also introduced a massive $82 billion aid package to support its citizens and businesses impacted by the COVID-19 pandemic.

If nothing is done unemployment will increase in the future and create a massive supply shock as production will be reduced due to the lack of people working.

As people come out of this pandemic there will also be a demand shock that needs to be taken care of. As people come out of this pandemic (out of social distancing) they would want to buy and do things they could not do due to the lockdown (Travel, Eating outside, Recreation and so on). If these things are not looked after it would be like a volcano and an earthquake erupting in the same place at the same time. Inflation will rise rapidly if not controlled and lack of production of goods may cause mass panic and destroy the entire economic system.

This may also be a horrible time for entering the job market. It may be very hard for you to find a job straight out of this pandemic as companies will look to cut spending in order to protect themselves. This may also lead to salary cuts and mass layoffs.

So, if you can’t find a job you might want to work on a personal project or maybe start a business. There is a reason why most startups succeed during the time of a recession. This is because of the demand shock that is already present in the market and lack of competition as many established companies suffer bankruptcy creating a massive vacuum in the supply chain. 

Some viable solution to minimizing the impacts

Policymakers should be considering various forms of tax relief, public guarantees and to help firms borrow money if necessary.

I think the idea of Universal Basic Income (UBI) must be brought into effect a lot faster than it was predicted by Andrew Yang. Millions of unemployed individuals sustaining their lives via monthly income are especially suffering during this pandemic. Our Government must step up to provide economic relief, especially to those people. Companies might also have to take a stand and pay their employee’s salaries by dipping into their reserves.

A short term relief through allowance may help a lot of people sustain their lives. This is not a bad thing as that allowance will most likely flow back into the economy saving many lives in the process.

Homeowners must step up and do the humane thing by putting a temporary hold on rents. If people are too greedy then the Government must step in to make it mandatory. With no jobs and no source of income, it is already hard for many to manage food let alone pay their rents on time.

Developed countries might have to help developing countries rebuild after this pandemic is over. This might be a bit too optimistic because amid this global pandemic and a global recession likely to follow every country at first will look to save its own skin.

Govt relief package as of March 29, 2020

  • The Government urged landlords to exempt rent to tenants (especially wage garnering tenants) for a month.
  • Rebate on house rent tax on the waived rent from house owners.
  • 25% rebate on electricity tariffs to customers who consume up to 150 units of electricity.
  • No penalty if electricity, water and telephone bill of Falgun and Chaitra are cleared by the end of Baisakh.
  • Telecom service providers (Nepal Telecom and private TelCos) should offer a 25% discount on data and voice calls throughout the lockdown
  • VAT, Income Tax and Advanced Tax payment deadline extended till Baisakh 25
  • ISPs encouraged to offer 25% off on services
  • Food relief to marginalized households through local level governments throughout the lockdown.
  • Food Management and Trading Company and Salt Trading Ltd to offer a 10 percent rebate on rice, lentils, sugar, oil, and salt during the crisis.
  • Health ministry to be accorded additional budget for procurement of medical supplies
  • Customs waiver on import of medical equipment and all drugs
  • Loans to be channeled to epidemic affected areas
  • Employers directed to pay salaries of wage workers of organized and unorganized sectors
  • Provincial and local level governments to establish a fund through to disburse relief materials
  • Contributions for the month of Chaitra for those registered at the Social Security Fund
  • Insurance up to Rs 2.5 million to those battling Coronavirus
  • Extension of deadline for paying taxes for Falgun and Chaitra.
  • Reduction on import quota of gold to 10 kg per day from 20 kg.
  • Vehicles’ import worth more than $50,000 has been banned.
  • Govt to take loans worth approximately Rs 22 billion from the World Bank, ADB, IMF

Source: https://thehimalayantimes.com/kathmandu/govt-announces-relief-package-highlights/ Published on March 29,2020

Leave a comment if you want me to break all of this down individually. By taking a quick look at this I don’t think this will be enough. But something is better than nothing. I will update this as more information comes along. Also, urging is not enough if you can’t enforce actual policies. It’s like asking a rich guy to burn all his money. Asking him nicely will not make him do so.

How this might all play out (A story)

Disclaimer: This chart is based on my personal analysis. I have spent a lot of my time studying the history of financial crises and I have found that almost all financial crises have a specific pattern they all follow. This chart is a representation of how I think this crisis may play out.

Impacts of Covid-19 to the Nepalese Economy and its individuals | Solutions and a reality check

Summary

The price of the common goods will likely rise rapidly until this pandemic is over. And after the pandemic, however, the economy as a whole might enter a deflationary phase as people start to cut spending, to pay off old loans, credit disappears as people do not want to borrow more money, assets prices drop and banks get squeezed as people start to withdraw cash in bulk.

This economic recession however long it lasts will not be pretty and millions may die even after we get rid of the virus. The economic shock that this country will face will reverberate and probably impact this generation for years to come. But there is still hope if the Government and organizations step up and come up with good policies to help the citizens of this country and especially the lower-income families. Good policies enacted swiftly may help to lower human suffering, which at this stage seems inevitable. 

Some links to help you dive deep into economic principles and how money works

Resources

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This Post Has 4 Comments

  1. Sandhya Paudyal

    Thanks for the insightful content sir.

    1. RT

      thank you, child!

  2. Mohin Dongol

    nice one dai sahii

    1. RT

      thank you, brother!!

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