Valley
IMF paints bleak economic picture
The International Monetary Fund has warned that Nepal could descend into an economic mess due to the magnitude of the destruction caused by the April and May earthquakes and the ongoing Tarai unrest that has led to trade disruption and a severe fuel crisis.The International Monetary Fund has warned that Nepal could descend into an economic mess due to the magnitude of the destruction caused by the April and May earthquakes and the ongoing Tarai unrest that has led to trade disruption and a severe fuel crisis.
If the trade disruption is not resolved soon and comprehensively, it will be increasingly difficult for Nepal’s overall economic activity to catch up and register positive growth in this fiscal year, the IMF said in its latest report. “Downside risks to the near-term outlook have become more pronounced.”
Nepali government officials have predicted that the country could see a negative growth rate this fiscal year as all economic activities have come to a grinding halt due to the fuel crisis resulting from India’s unofficial trade embargo.
The report prepared by the IMF on November 16 said that economic activity had been slowing markedly in recent weeks in the absence of viable alternative ways for Nepal to secure adequate fuel in the short term.
“Industrial production and tourism are badly affected by the unavailability of fuel and other essential inputs. The government revenue, particularly customs revenue, is down considerably. And so is government spending,” the report said.
Nepal’s major trade lifeline has been cut off by the Tarai unrest and the Indian embargo that are in their third and second months respectively. The output of the three major sectors of the economy—agriculture, manufacturing and service—has dropped sharply following the trade disruption.
“Men and machines are out of work as hundreds of factories have collapsed,” said Bishwamber Pyakurel, a senior economist. “Based on these overall scenarios, it is inevitable that Nepal will see negative growth in the economy this fiscal year after the 2000 economic depression,” Pyakurel said.
Nepal Rastra Bank’s report on the Economic Cost of General Strikes in Nepal shows that the average direct cost of a shutdown stands at Rs1.8 billion a day.
Based on this data, the country could have lost output valued at more than Rs150 billion in the three months of unrest. The figure is much higher than the Rs117 billion accumulated loss that Nepal suffered from general strikes during the five-year period from 2008 to 2013.
However, Pyakurel said that the losses could be considerably higher. “The central bank’s figure represents the effect of general strikes only. It does not take into account the vicious cycle of unemployment, black market, falling revenues, skyrocketing inflation and declining output that the trade embargo and fuel shortage have created.”
Recently, Deputy Prime Minister and Foreign Minister Kamal Thapa informed a meeting of the UN Human Rights Council in Geneva that Nepal had incurred losses totalling more than $5 billion due to the blockade.
The IMF said that with the winter approaching and shortages of essential supplies worsening, the near-term outlook for Nepal’s population is bleak, particularly for those left homeless by the earthquakes.
“Delays in starting with post-earthquake reconstruction are compounded by the trade disruption. Fuel shortages are affecting the delivery of emergency supplies to remote regions affected by the earthquakes.”
The report said that the country’s real GDP growth is estimated to have decelerated to 3.4 percent in 2014-15, compared to a pre-earthquake baseline forecast of 5 percent. Growth had accelerated to 5.5 percent in 2013-14 owing largely to a favourable monsoon. The average growth of 4 percent in the three previous years was lower than in the neighbouring countries.
Likewise, the report said that despite the growing import requirements of post-quake reconstruction, Nepal’s external sector situation further strengthened in 2014-15 with the balance of payments surplus reaching $1.43 billion, from $1.29 billion in the previous fiscal year, due mainly to the current account surplus, supported by sustained overseas remittances.
This has enabled Nepal to maintain adequate gross foreign exchange reserves of $8.28 billion as of mid-September 2015, which is enough for the import of goods and services for more than 11 months.
Based on the reconstruction initiative, the government had projected a GDP growth of 6.0 percent for 2015-16. However, a prolonged drought, the blockade-like situation in the Tarai and the ensuing fuel crisis have delayed the start of recovery and reconstruction-related projects, posing risks to the growth and inflation outlook, the IMF said.
It said that Nepal had been trapped in a low-investment, low-growth equilibrium and remains one of Asia’s poorest countries, despite progress in poverty reduction.
However, on the positive side, the current scenario has been deemed to be a temporary phenomenon, the IMF said. Once stability returns, there would be confidence-building measures, due mainly to the new constitution.
Growth is expected to gradually rebound to around 5.5 percent by 2016-17, as economic activity recovers from the earthquake and reconstruction gains momentum, the IMF said.
Crisis in the making
- Economic activity has been slowing markedly in recent weeks in the absence of viable alternative ways for Nepal to secure adequate fuel in the short term
- Industrial production and tourism are badly affected by the unavailability of fuel and other essential inputs
- Government revenue, particularly customs revenue, is down considerably. And so is government spending
- The output of the three major sectors of the economy - agriculture, manufacturing and service - has dropped sharply following the trade disruption
- With the winter approaching and shortages of essential supplies worsening, the near-term outlook for Nepal’s population is bleak, particularly for those rendered homeless by the earthquakes in April and May
- Nepal’s real GDP growth is estimated to have decelerated to 3.4 percent in 2014-15, compared to a pre-earthquake baseline forecast of 5 percent
Silver lining
- According to the IMF, the current scenario has been deemed to be a temporary phenomena. Once stability returns, there will be confidence effects from the new constitution
- Growth is expected to gradually rebound to around 5.5 percent by 2016-17, as economic activity recovers from the earthquake and reconstruction gains momentum