Covid-19, economic crisis and the Nepali economyThe government’s policies and priorities for economic development require a revision.
Jagadish Prasad Bist
The Covid-19 outbreak has now become a global apprehension, taking more than 5,000 lives worldwide. The World Health Organisation declared it a pandemic. The disease has not remained only a health issue, but also become an economic catastrophe. Amidst plunging world economic indicators, economists are worrying whether Covid-19 will wreak havoc on the global economy. The major stock markets are plunging, industries are shutting down, and oil prices are tumbling like never before. According to The Economist, oil prices slumped on March 10 to their lowest level since the financial crisis of 2007-09. The magazine called the day a new Black Monday in financial markets.
Falling demand for crude oil due to sluggish economic activities in the major importing countries (China, United States, Japan and South Korea) is putting pressure on the prices. But the response from OPEC, the Organisation of Petroleum Exporting Countries, has confounded economists. Economists are urging OPEC to cut supplies to correct the plummeting oil prices, but its members are wrangling over Russia’s decision not to slash output. In fact, Saudi Arabia made a U-turn on its decision to cut supply amid the stalemate between OPEC and Russia. This situation is making economists worry about a possible crude oil price war.
Suffering tourism industry
The effect of the crash in oil prices has already been reflected in major stock markets all over the world. The S&P 500 plunged by nearly 8 percent on Monday. Though China is gradually winning the fight against the outbreak, factories are still closed and workers have not fully returned to work. This situation has stymied manufactures all over the world that depend on Chinese exports. The world tourism industry has suffered a lot due to restrictions on tourist movement from Covid-19 affected countries to different destinations.
According to The New York Times, because of this epidemic, organisers of major sports championships, conferences and small gatherings around the world are now either postponing their events or cancelling them. The United States has already suspended travel from Europe and declared a state of emergency in 19 states. These statistics show that the world economy is running out of steam. If the pandemic is not controlled worldwide shortly, the Nepali economy is also going to suffer a crisis, even though it remained immune to past economic catastrophes such as the great recession of 2007-09 and others. The effect of Covid-19 is already evident on the tourism industry.
The Nepali economy is likely to see a spillover effect mainly on three fronts—remittance inflow, tourism industry and international trade. Given the nature of the economy—which is based on the service sector and agriculture—the country's tourism industry is going to suffer immensely. The reduced flow of tourists, restrictions on the entry of citizens from infected countries and the cancellation of Visit Nepal 2020 have put the hospitality industry in peril. Statistics show that the occupancy rate in the hotel industry is decreasing sharply. Chances are high that the disease will affect more people economically—either causing them to lose their jobs or making them go bankrupt—than through infection. According to government agencies, no one in Nepal has been found to be infected by the virus.
The coronavirus outbreak is posing an increasing threat to remittance inflow too. The rampant spread of the virus in Europe, the Middle East and the Gulf countries is likely to hit workers’ remittance: More than 50 percent of the remittance comes from the Gulf countries. Given that Nepal's foreign currency reserves are highly dependent on remittance, in a worst-case scenario, a reduction in remittance inflows on the economy could be disastrous. It is not only going to hit foreign employment, but also liquidity in the financial market, household economic activities and international trade.
Foreign exchange reserves
According to Nepal Rastra Bank, the current level of foreign exchange reserves is sufficient to cover merchandise imports for 9.6 months. However, if the foreign employers scale back projects, it will further weaken remittance, the reserve fund and ultimately trade. The pandemic will also create shortages of consumable goods and raw materials if the outbreak continues to spread in India. The southern neighbour has already closed down some of the border crossings. In case India decides to seal the borders, Nepal has no option but to endure a huge economic recession because it depends on the neighbour for almost everything—from agricultural seeds to industrial raw materials, from daily consumable goods to medicines and so on.
Given that, the government must be prepared from every aspect—a possible entry of the disease itself and likely reduction in remittance, supply of goods and services, raw materials, petroleum products, medical equipment and vital medicines. The government’s policies and priorities for economic development require a revision to fight possible disruptions. The economic targets for the current year seem no longer achievable amid the Covid-19 pandemic. The government expects the economy to grow at a rate of more than 8 percent this fiscal year. But that is farfetched.
The current priority should be to amass as much required resources as possible and take corrective actions before the virus enters the country and the economy. For this, the government has to work closely with the private sector, foreign agencies, major trade partners, health workers and other stakeholders to ensure that the country has enough resources to expel the plague out of the economy, in case it makes its way to Nepal.
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