US-Iran war could wreck Nepal economy

As the sabre rattling between the United States and Iran escalates into open tit-for-tat violence, there are fears that a war in the Persian Gulf will, besides causing major death and destruction in the region, will affect South Asian countries like Nepal whose economies are heavily dependent on migrant workers.

A new West Asian war could easily suck in regional rivals Saudi Arabia and Iran, as well as other countries in the region allied on either side with them. For example, the UAE, Egypt, are with Saudi Arabia, while Iran, Turkey, Russia and to a certain extent Qatar are sympathetic to Iran.

Economists have said a potential conflict would have worldwide repercussions on energy prices, and cause a domino effect on the economies of South Asia, including Nepal which is among countries most dependent on remittances from the Gulf.

Together, South Asian countries have nearly 20 million of their nationals working in Saudi Arabia, Kuwait, Qatar, UAE, Oman and Bahrain who sent home $131 billion in remittances last year. Nepal alone has 1.5 million of the 4 million of its nationals working abroad in the Gulf region.

Simmering tension between Saudi Arabia and Iran escalated this week after Iranian-backed protesters attacked the US Embassy in Baghdad. In retaliation a US airstrike early Friday morning killed Maj Gen Qassem Soleimani, a prominent Iranian general in Baghdad who belongs to the Revolutionary Guard.  Abu Mahdi al-Muhandis, the deputy commander of a militia in Iraq known as the Popular Mobilisation Forces and five others were also killed. 

Soleimani was a key figure in Iran’s military presence in Iraq, Syria and Yemen and has been seen as a charismatic figure. Militia that he backed have attacked US forces in Iraq and Syria for the past decade. Iran warned that it would respond and a “harsh retaliation is waiting”.  

Tensions have been high in the Strait of Hormuz through which most of the world’s oil import passes after two oil tankers were attacked in May and set on fire and an airport attacked. The Saudis immediately blamed Iran and the Houthi rebels in Yemen that it backs. The Houthis were also blamed for a missle attack on an Aramco refinery in Saudi Arabia in November.

One of the ships attacked in May was the Japanese tanker Kokuka Courageous, which was struck even as Iranian leader was meeting Japan’s Prime Minister Shinzo Abe in Teheran.

The United States is already involved in the region, with its navy including aircraft carrier Dwight D Eisenhower patrolling the strategic Straits of Hormuz. Washington has sided with Saudi Arabia in the conflict, and has been piling pressure on Iran with international sanctions.

West Asia has been polarised by the dispute, with the UAE and Israel taking Saudi Arabia’s side against Iran, while Qatar which is still being blockaded by Saudi Arabia and the UAE being much more sympathetic to Iran.

Qatar is the country with the highest number of Nepalis, with nearly 600,000 workers. Saudi Arabia has 350,000 Nepalis, and the rest are scattered in other Gulf countries.

If open hostilities did break out between Saudi Arabia and its allies against Iran, Nepal would be hit indirectly by soaring oil prices. The government raised oil prices on new year’s day in Nepal, as global prices went up with tensions rising in the Gulf.

Nepal spent Rs131 billion last year in petroleum imports from the Gulf via Indian refineries, and the amount doubled in the last five years. More than 15% of Nepal’s total import bill is made up by petroleum which is sourced in the Gulf.

However, experts say, South Asian economies will be hit much more directly if remittances take fall due to a future conflict. Of the South Asian countries, Nepal is the most dependent on remittances with the $6.5 billion it earns annually from overseas workers coming mostly from the Gulf. Remittances are worth 31% of Nepal’s GDP, the highest proportion in the world – even higher than labour exporting countries like Kyrgyzsan and Haiti.

Remittances to South Asian countries from the Gulf region grew 12% in 2018, double the growth rate for the previous year, according to the World Bank. Remittances to India alone grew by 14%, while Bangladesh saw an increase of 15%.

There has been an increase of numbers going to Qatar in the past year as the country prepares for the 2022 World Cup, as well as an increased demand for dairy and agriculture workers as Qatar has tried to be more self-sufficient in food production after the Saudi-led blockade two years ago.

However, the number of Nepalis going abroad has gone down in the past year, mainly as a result of the freeze on workers to Malaysia because of delays in implementing a new bilateral labour deal between the two countries.

Any conflict in the Gulf would also directly affect tourism as Nepal prepares to welcome 2 million tourists in Visit Nepal Year 2020. All the air routes to Nepal from the west pass through the Gulf region, and these links have already been affected by other tensions: the closure of India-Pakistan air space for through flights, and flights to and from Qatar having to fly over Iran to bypass the Saudi-UAE blockade.