Unlocking the economy post-lockdown
The COVID-19 pandemic has caught the world off guard, with enormous repercussions for Nepal’s economy because of its reliance on overseas migration and tourism.
Nepal’s three week lockdown has been extended till at least 27 April. Flights are not going to restart till mid-May at the earliest. The country’s remittance-fueled, consumption-led economy, low manufacturing capacity, unemployment, huge trade deficit, high reliance on import-based consumption have been pre-existing challenges even before the lockdown. The pandemic has made everything more difficult.
Tourism is the hardest hit, especially the hotel industry which is most vulnerable due to the fixed cost associated with not only salary and wages but also regular maintenance well as loan servicing obligations. Tourism is cash flow sensitive, and its oxygen supply has come to complete halt. It will take at least till 2021 for travel and tourism to revive, or rebound. Priority rescue measures are urgently required.
Transport is another sector that needs urgent attention. Once the lockdown situation improves, transportation will kickstart itself. But till then, the industry needs support to manage maintenance and financial obligations.
Aviation witnessed a quick rebound after the double whammy of the earthquake and Blockade, particularly for domestic movement. The situation is different this time. The high cost of grounded aircraft due to leasing, fixed and variable costs will pose a major challenge. Big ticket loan exposure and interest expense may just kill some operators.
Most airlines have equipment on ‘Dry Lease’ that carry certain fixed costs ranging from $100-150,000 per month for smaller aircraft. Dollar fares for expats and tourists have been a major revenue earner for operators, and with tourism down this will dry up.
Finance industry including the banking sector are operating at bare minimum, and only offering basic services such as cash operation including remittance services and basic trade finance. New book creation has virtually stopped as no loan processing is being carried out.
Also keeping financially healthy in a lockdown, Siddhant Raj Pandey
Liquidity has been a problem that predates the pandemic. Nepali BFIs have been long plagued by liquidity crunch, particularly after the real estate crash of 2009. After the earthquake, the industry faced a major credit crunch. The capital hike, reconstruction demand, a stable government all led to a surge in loan demand. But an unstable liquidity supply was a chronic threat.
If prolonged, this could lead to assets price burst and real-estate could take the plunge. Banks would have to revalue risk assets, as most are backed by real estate collaterals. In short, non-performing assets need to be closelh monitored.
Remittance-dependence has fuelled consumption growth, and this could be affected by coronavirus outbreaks in destination coutnries for Nepali migrants like Japan, Malaysia, Korea and the Gulf. In addition, there is now uncertainty about labour demand because of the global downturn. Annual remittances could take a nosedive.
Construction could pick up as soon as the lockdown is lifted. But big ticket projects, particularly ones with foreign contractors, in hydro, airports, highways could slow down and costs could overshoot. Banks with guarantee exposure in the construction sector could also be hit. The non-funded instrument could see ‘Willful Claim’ capitalising on grey area of force majeure, currently under discussion at the Nepal Rastra Bank and the banking sector.
Trade may rebound quickly because of Nepal’s import-based consumption patterns. However, the dent in purchasing power capacity due to loss of business and employment could be a matter of concern.
The Health Sector ironically may see a slowdown during the pandemic. The banks carry significant exposure in medical care in heads like working capital, term loan and fixed assets.
Balance of Payments could be a major concern as remittances drop. Tourism is another forex earner that is hit hard. Exports were always negligible, but even that will be slowed further with the lockdown.
Revenue Collection could dry up due to shortfall in revenue targets. This could limit spending and development in infrastructure projects, creating problems in multiple areas from employment, base level economic activities, consumption amongst others.
Small and Medium Enterprises are key economic enablers and yet largely out of formal sector reach. This impact assessment could be bit tricky and may require a deep dive into both formal and informal source of borrowings.
Perhaps linkage to cooperatives could be one way to establish the relationship so as to gauge the depth of the impact. The critical focus here should be on employment generation, domestic production and revenue collection.
GDP has 15 main sectors contributing to it. It may be wise to run a predictive analysis of each critical sector that may impact employment, value chain, economy amongst others.
These are trying times for the economy, and we must be strategic about pressing the right buttons to speed up the rebound.
Sanjib Subba was until recently the CEO of Nepal Banking Institute.