The Covid–19 (coronavirus) global outbreak is first and foremost a public health crisis but the way situations are unfolding, it is also posing a huge economic threat. This crisis can be the catalyst to trigger a recession in some countries and deceleration of global annual growth to a recessionary threshold limit of below 2.5 percent for the global economy. Our country is also expected to go through similar socio-economic challenges contributing towards a bleak outlook of the future. However, all hope is not lost and there is a way forward to mitigate the financial/economical impact that this pandemic can cause in the coming days and months.
In such a testing time, when an analytic study is explored through the vast majority of scientific literature available online, it can be inferred that the duration and depth of this crisis will depend on three variables: 1.how far and fast the virus spreads, 2. how long before the medication/vaccine is found and 3.how effective policy makers can lessen the damage to our physical and economic health and well being. The uncertainty surrounding each of these variables is adding to the general public anxiety towards the situation.
The duration of the outbreak directly dictates the economic consequences of the pandemic. For developed countries with sound economic system, the shorter the duration, the stronger the chance of a recovery through a mix of accommodating fiscal and monetary policies (sort of like a “V” shape, where there is a dip but a sharp overturn). However, if this pandemic does last a long time, it will be very difficult for even the developed countries to get back on track with an extended dip in the economy (picture it as a “U” shape). These two scenarios do not really fit into a developing country like ours due to the depleted state of our economy and thus, the pandemic’s impact needs to be analyzed from a different point of view.
Endeavors are being made to analyze the economic sectors where there has been significant impact already and come up with possible remedial measures for mitigating the pertinent economical risks. An effective response to the economic outcomes post-crisis will require not only active and targeted macroeconomic measures, but also a series of supportive policies and institutional reforms that help build a robust, sustained, equitable and climate friendly recovery. Hence, the writer here opines that there is a potential to bounce back strong from the situation namely, through firm determination, integrity and compassion in leadership. This will be explored in the two sections of this essay, firstly providing a Nepalese perspective towards the impact and then moving onto the steps that can be taken.
Impact Analysis – A Nepalese Perspective
Before analyzing the impact of coronavirus crisis in our economy, a peek into the recent macroeconomic data of NRB seems very logical. The key data as on the mid of February, 2020, though has not suggested anything about the GDP growth (which was over 6% in actual for the last 3 consecutive years with the official unreachable GDP target rate of 8.5% for the current fiscal year) but as can be conjectured easily to be much meagre in light of further aggravation of the current plight not only domestically but globally as well. Further, the area of interest for common people can be food consumer price index ( Food CPI) which seems to be at the highest of over 9% during the last 3 years. With the complete lock down and no higher production of food items, the inflationary pressure for the people at the bottom of economic pyramid to procure essential food items is expected to rise dramatically in the days to come. A positive aspect however is on account of Balance of Payments where it is witnessed that the import growth has declined in comparison of the paltry growth of export but this is not sure will last how long post the crisis time. Another alarming point to ponder is foreign inward remittance which has in fact come down in amount during the period as compared to the corresponding period of the last fiscal year. The situation will worsen due to the economic slowdown in the countries where Nepalese migrants are predominantly working especially in the gulf countries which are now reeling with the reducing prices of crude oils along with dealing with the pandemic corona.
During the last seven months of this fiscal year, the government revenue growth has been sluggish with the lowest rate of 18.5% in comparison the last 3 years. This situation is expected to worsen further in the days ahead in this fiscal year due to obvious reasons including that of the covid factor. Similar fate is there in tourism sector also with the stagnation of number of tourist arrival in the country before the covid outbreak in this fiscal year.
Another area of concern, is the sluggish growth of credit flow to the real sectors of the economy by the Banks and Financial institutions. The credit growth to the private sector was targeted at 21% as envisaged by the Monetary policy of this fiscal year. It is however deemed very low when sector wise growth of the first 7 months of this fiscal year is observed in credit flow in the real sectors like 11% in Agriculture (36% last year), 10% in Production (18% last year), 10% in Construction (15% last year)12% in Service (17% last year) with overall growth of 9% as compared to 14% growth during the corresponding period of the last fiscal year.
Thus, a bird’s eye view on the economic situations of Nepal needs immediate remedial actions on the part of government and policy makers for stimulating the already sluggish economy expected to aggravate further during the pandemic.
Whilst understanding impact analysis of our economy pre and post covid crisis as aforementioned, it is considered meaningful for the treatments according to the economic disruptions caused. These disruptions if categorized widely may be summed as through 3 major factors; demand (declining private/public spending), supply (sluggish manufacturing) and finance (deepening financial vulnerabilities). The responses addressing these issues may be short, mid and long term but here an endeavor is made for some prompt supports essential for bringing the economy back on the track at the time of facing this covid crisis and thereafter.
As witnessed around the major economies, a temporary boost to emergency health spending – with free care for those affected by Covid-19, can definitely be an obvious response with some immediate financial or food support for those especially the poor segment of the society earning daily food through earnings daily. Though this not regarded as the productive use of the scarce financial resource for the country like ours but considering the urgency, this proposition is indeed worth pursuing on the part of the government. For this, as a part of humanitarian support, the Private sectors including Banks and financial institutions can play an important role from their CSR fund as well if allowed by the regulatory provisions.
Amongst other macroeconomic measures for short/mid term, like other Governments who are willing to do “whatever it takes” to stabilize the economy and who prefer to increase their spending until private-sector demand and employment return to healthy growth rates, the same can be worth replication by our government in the sectors especially like Infrastructures, Agriculture, Power and Tourism with further taking into accounts of strengths/vulnerabilities of our economic sectors.
As regards the ingredients of sensible policy measures on the part of Nepal Rastra Bank, the endeavors are obviously deemed appropriate towards relaxations of existing norms of provisions including the Watchlist (as also pronounced in the Mid term review of the Monetary Policy for the ongoing fiscal year) with policy level interventions like lowering policy/refinance interest rates, incentives like lowering of CRR/SLR with adequate refinance fund, less stricter terms for refinance for real/priority sectors. The other areas of boosting finance for the Micro and SME sectors can be bringing up finance friendly measures for these sectors. The remedial measures mentioned here are not exhaustive and may evolve depending upon the unfolding of the situations post the covid crisis.
Amongst the 3 pillars of our economy, Private, Public and Cooperative, the last but not the least, the cooperative sector should also be mobilized for further giving impetus to our economy. This can be done through linking the cooperatives to the production and distribution ends under a Value Chain system. There would be no dearth of supply of financial debt to these cooperatives who are indeed in the constructive role of linking the points of commodities (preferably high value items like organic, medicinal herbs, high altitude fruits along with traditional items) production and distribution of the produced commodities to the end users, thereby helping the real productive sectors of the country. For this, there needs to be formulation of necessary regulations by Nepal Rastra Bank for the BFIs to use their financial resources through these cooperatives to build a Value Chain based financing system in the country. Needless to mention, the necessary risk mitigation measures will also be warranted in such model and the BFIs need to take this account while embarking on this model.
Finally to sum up, apart from the aforementioned, the key point is all about reducing the cost of performing task/business be it on government, private or societal level. After all, better the rank of doing business, easier for the country like us to attract foreign capital. The current covid crisis also suggests this in the form of social distancing. Not a rocket science but a simple lesson out of this crisis in my opinion is building a Digital Ecosystem wherein all the functions related to Government, Private Sector, different societal institutions all can be performed digitally. This though seems ambitious, is deemed very much achievable step by step with each Head of the units/departments/ministries/institutions in all types of government/regulatory/private/societal machineries of the entire national ecosystem remains committed towards working to accomplish this. This may take considerable time but trust, is very cost/time effective for the growth of formal economy prospering the nation in the mid/long term.
Mr. Pradyuman Pokharel
Chief Executive Officer
Muktinath Bikas Bank Limited