Economic cost of 5 months of Nepal lockdown

As serious as the rapid spread in Nepal of the novel coronavirus looks, even more frightening is what the lockdown meant to prevent it will do to the country’s economy. The health impact of the virus may pale in comparison to long-term damage to the country from a prolonged lockdown that enters its sixth month today.

It is difficult to make predictions on how Nepal’s economy will fare till the end of the year because that will depend on how the virus behaves. But all indications are of that SARS-CoV-2 is here to stay, and that it will resurface with added virulence in winter.

On 21 July when Finance Minister Yubaraj Khatiwada triumphantly announced that the pandemic in Nepal had peaked, and the lockdown had been lifted, traders, businesses and industries were cautiously optimistic. But since then there has been a surge, with cases and fatalities more than doubling in the past three weeks.

Aside from essential food and other items, business transactions are down by more than half since 24 March when the restrictions were first announced. Even when the lockdown was eased last month, the people’s purchasing capacity had gone down and businesses did not really pick up.

The Rastra Bank estimates that it will take at least nine months after the lockdown is fully lifted for the economy to come back to previous levels. This means Nepal is not going to see a recovery this fiscal year. The central bank says 22.5% of those employed in the country have lost their jobs in the past five months of lockdown.

The central bank expects Nepal’s economic growth rate to plunge from 6.9% last year to less than 1% this year. But the World Bank is even more pessimistic, it says the growth rate may even go into negative 2.8% if the crisis continues.

“Everything is at a complete standstill, there are no transactions taking place except people buying food from day to day,” says Shekhar Golchha of the Federation of Nepalese Chambers of Commerce and Industries (FNCCI). “The question is how long before businesses run out of cash to pay salaries, and families run out of savings.”

Factories along the Itahari-Biratnagar and Simara-Birganj corridors have been hardest hit not just by the plunge in demand but because workers who had returned from India after 21 July started falling sick.

One of those hit was Jagadamba Steels, whose Sahil Agrawal says: “The sale of steel rods had picked up somewhat after the lockdown was lifted, but after workers tested positive, the local administration closed the factories. Now, with the lockdown everything is closed.”

Even worse hit is the tourism and aviation sector where revenue is zero for the past five months. Banks had given loans worth Rs1.1 trillion for hotels and restaurants, and had lent Rs40 billion to the transport sector. They are not in a position to replay even the interest, let alone the capital.

Imports are down 20%, from Rs1.7 trillion in the first half of last year compared to only Rs85 billion in the same period this year. That should be good news, but it means the government’s tax revenue has gone down by more than half.

The middle class has been hit hardest with incomes falling. Of the 923,000 registered businesses in Nepal, nearly all are small and medium enterprises employing less than ten people. As a result, house and property transactions have gone down by half last month compared to the same period in 2019.

“Except for mobile phones, motorcycles, fast moving consumer goods, nothing else is moving,” says Golchha. “Even when they do shop consumers are buying cheaper items, which is an indicator of a drastic fall in income.”

Even the sale of alcohol products are down by up to 80%. Bhat Bhateni Supermarket’s Panu Poudel says turnover in the nationwide chain had picked up after 21 July, but was still down by a third, but now it is back to zero again.

But the real barometer of just how bad the crisis is can be felt in the banking sector where on the one hand liquidity is overflowing because of reduction in loan disbursement, but collection has also shrunk because of defaults. The print editions of the Nepali language press in the past month are full of bank notices for auctions of collateral property. However, even if the property is up for auction, they may be no buyers.

In the whole of July-August the banks collected Rs34 trillion in loan repayments, but they lent only Rs28 billion. “The reason is that it is difficult enough just to survive for businesses, and they are in no position to take a loan to invest,” says businessman Pashupati Murarka.

The government had told borrowers they had a grace period till December to repay bank loans without being put on the defaulters’ black list, but it is looking like even that is being optimistic.

One ray of hope for businesses was that public spending would increase in the run up to Dasain, which this year falls at the end of October. But most businessmen have given up on a Dasain-Tihar revival this year. Car sales used to go up at this time, but the Nepal Automobile Dealers’ Association has cancelled its annual auto show, and its chair Krishna Dulal says: “This year we are just trying to get by, there is no hope for sales.”

With revenue down, the government will be forced to borrow. But the state borrowing already makes up 37% equivalent of the GDP, and it could go up to 51% by the end of this fiscal year. Economist Govinda Bahadur Thapa says the government may run out of money if the current trend continues. He says: “We have brought the economy to a standstill to save lives, but we need to save the economy as well. It is a very difficult balance.”

Former finance secretary Rameshore Khanal is not as pessimistic. Although he does not discount the seriousness of the crisis, he thinks what could save Nepal is that it is still largely a subsistence economy and families have coping mechanisms to get by in times of extreme hardships. For example, remittances from Nepalis working overseas have not gone down despite predictions it would drop drastically.

He says the crisis also presents opportunities for the government. “We can have a pro-active policy to channel unemployed Nepalis to the jobs 1.5 million Indian workers used to do before they went home, and this would be the time to flood the market with liquidity in order to inject cash and raise purchasing power.”

Read also: Ways Nepal can rebound from Covid-19, Bikash Pandey