Nepal’s Economy Plunges

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September Analysis

The chilling effects of the COVID-19 pandemic are not inconspicuous anymore. The world has severely suffered in terms of health which led to a deteriorating world economy. As of September 24, 2020, there are approximately 32 million cases, 22 million have recovered while the death toll stands at around 978,000 deaths. From the economic perspective, the worst-case scenario assumes that the world will lose USD 35.3 trillion by 2025 if a vaccine isn’t developed by then.[1] Contrastingly, in the best-case scenario, assuming the countries experience a single wave in 2020 and a mild outbreak in 2021, the global loss will be USD 17.6 trillion till 2025. The failure of the government’s worldwide to introduce stimulus relief packages and explore viable methods to sustain the economy and save lives simultaneously has drastically impacted the global growth. Months long lockdown has done more damage than good.

Furthermore, the Nepal economy has severely contracted through the various phases of lockdown and prohibitory orders from March-September; approximately six-month lengthy lockdown. Merely 4% of the industries were fully operational, 35% partially, and 61% were completely shut. Due to negligible revenue and productivity, 22.4% labourers were reportedly laid-off whereas many labourers faced heavy salary-cuts.[2] Several Micro, Small and Medium Enterprises have also filed for bankruptcy. A survey revealed that over 50% of the MSMEs face the risk of permanently shutting down.[3] A chain of reaction has been explained through the cycle.

This reaction is dreadful for enterprises who lose revenue, demand, and are exposed to the risk of defaulting loans or other credits. MSMEs are incredibly crucial for Nepal’s economy; however, with a decline in demand and revenue, employers had no option but to forego employees.

According to ILO, lower-middle-income countries like Nepal witnessed the most massive plunge in labour income losses reaching 15.1%.[4] One of the prime reasons for this is because, in developing countries like Nepal, the workers in informal and blue-collar jobs are the ones who are the most affected. Furthermore, the lack of production activity across the country also attributes to the labour loss income.[5] Global data reveals that higher the fiscal stimulus as a percentage of GDP, lower the loss in labour working hours. However, this recovery through fiscal stimulus has been more prominent in high-income countries (such as Germany) and may prove unsuccessful in Nepal due to the limited spending capability. ILO further said that lower-middle-income countries need to inject USD 937 billion more to reach the same level of fiscal stimulus as high-income countries. Experts suggested that the countries must at least redirect their finances from other objectives to mitigate the labour crisis.[6]

According to Nepal’s macroeconomic update, the agricultural sector will grow as paddy yield may increase after the monsoon; however, this depends on the timely procurement and use of fertilizers. The update also highlighted that the overall output across the country would decrease and there will be a contraction in the manufacturing and construction sectors. Similarly, service sector undoubtedly has faced the most massive slump as tourism, both domestic and international, remains closed. As Nepal’s most celebrated festivals are approaching, Dashain and Tihar, businesses have still not shown progress in revenue and operation since the people/ locals are scared about stepping out to shop.

Finance Minister Yubaraj Khatiwada had announced an ambitious growth rate of 7% during the budget speech against Asian Development Bank’s recent growth prediction at a mere 1.5% for the current fiscal year. According to Central Bureau of Statistics, in the third quarter of the previous fiscal year, Nepal’s growth rate was 0.8%[7] which is concerning as the fourth quarter result (during the initial lockdown months) will be even more devastating. This raises concerns for a negative growth rate which might be hinting towards a probable recession. Furthermore, a sharp plunge in India’s economy, Nepal’s primary trade partner, will also have a cascading effect on Nepal’s economic situation.

Again, the macroeconomic update, assuming a good harvest, modest oil prices, and subdued non-food prices on weak domestic demand, projected that the inflation rate would average at 5.5%, which is 0.7% points down from the previous year. Moreover, the current fiscal account deficit will widen to -1.9% as remittances have plunged.[8]

Nepal’s economic situation will worsen if, by 2021, the advanced economies do not bounce back for employment purposes. This will take a long-term hit at Nepal’s remittances and labour income. The policy focus should entirely be on saving the health and economy of Nepal. Other objectives are trivial in terms of the COVID-19 recovery. Nonetheless, the financial stability of Nepal is still at risk due to the uncertainty around COVID-19 and a robust recovery plan for Nepal. The government needs to be more transparent with its programs, policies and spending. It must also inject money into the economy to drive fiscal stimulus and counter the economic plunge triggered by a fall-in-demand. Untimely action by the policymakers will cost Nepal it’s growth and progress up till now.


[1] https://www.thenational.ae/business/economy/covid-19-may-cost-global-economy-35-3-trillion-by-2025-1.1069246

[2] https://theannapurnaexpress.com/news/unemployment-in-nepal-worsens-as-government-fumbles-for-a-response-2715

[3] Ibid.

[4] https://kathmandupost.com/2/2020/09/24/covid-19-pandemic-leads-to-3-5-trillion-in-labour-income-losses-worldwide

[5] Ibid.

[6] Ibid.

[7] https://cbs.gov.np/wp-content/upLoads/2020/08/Quartely-Note_Q3.pdf

[8] https://kathmandupost.com/money/2020/09/15/nepal-economy-to-slow-further-and-may-grow-at-a-meagre-1-5-percent-this-fiscal-year-asian-development-bank

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