What’s really happening in the economyThe rosy picture presented by the central bank does not reveal a recovery phenomenon.
Jagadish Prasad Bist
Nepal Rastra Bank recently published the current macroeconomic updates for mid-August 2020. Amid the intractable Covid-19 pandemic, the figures evince a rosy picture of the economy. According to the central bank’s report, inflation remained below 3.94 percent, imports decreased by 19.6 percent and exports increased by 8.9 percent, remittance increased by 23 percent, the balance of payments showed a surplus of Rs51.46 billion, and foreign exchange reserves totalled $12.02 billion. Besides, the report also indicates a normal level of liquidity in the market, and the level of deposits at banks and financial institutions is similar to that of previous months. This succinct picture of the Covid economy is what is confounding economists. Arguments have arisen that the economy is expected to perform way below what these indicators show. Moreover, the prime minister has also been arguing that Nepal is not likely to face knock-on economic effects of Covid-19 on the same scale as other countries. However, the question is not about who is losing, it is more about to what extent.
Countries such as Nepal, which rely more on the service sector, have been more vulnerable than others. Recent updates by the World Bank presages that the South Asian economy is likely to shrink by 7.7 percent of the gross domestic product (GDP) this year. The report also presages that countries with large informal economies are more likely to face dire consequences.
The virus has devastated both supply and demand sides of the economy. This and the lockdown has drastically changed consumption patterns. This is why the inflation rate released by Nepal Rastra Bank does not show the real picture. Inflation has a significant effect across income levels. It is unbearable at the bottom of the income ladder due to a plunging relative purchasing power owing to price level increment and nominal income loss.
Another important issue with these statistics that could be exaggerated is the reduced trade deficit. Let’s not forget that Nepal imports almost everything it needs. A fall in the trade deficit indicates that the economy is not functioning properly: Manufacturing industries are shuttered, tourism and the recreation industry are at a standstill, and private sector investment is dropping. Unless the economy is independent in its production and supply chains, such reductions will do more harm than good. The import of industrial supplies, capital goods and fuel witnessed a significant reduction during this period of time. The story is different here. The important thing to ponder is that Nepal does not export industrial goods at a high level like other South Asian countries. Therefore, the effect comes from differences in the growth of domestic demand and supply, which is falling precipitously. This fact can also be used to understand the amount of foreign exchange reserves. The central bank reckoned the reserve at $12.02 billion. This is the result of plunging imports and increased remittances.
Though these macroeconomic indicators are important to analyse the economy, they are not sufficient. The economy is already in peril underneath the informal sector. The informal economy is facing dire effects: Wage-based workers, self-employed people and small scale industries are losing their regular income owing to the lockdown restrictions. In normal conditions, workers who have lost their jobs in the informal sector can be expected to become self-employed. However, the economic environment is dragging them into poverty.
Alternatively, to solve this puzzle, we don’t have to understand much economics. It will be enough to study the growth rate of the GDP which directly or indirectly includes almost every economic activity. The country is expecting to have near-zero growth this year.
Moreover, given the fact that the Covid-19 pandemic is worsening by the day and the winter season is just around the corner, experts are saying that the economy will have to face further lockdowns and deaths. This is going to wreak havoc on the economy. The economy has already triggered poverty, destitution and hunger in the nation. Though the country has done a remarkable job in reducing the poverty level in the last decade, the current pandemic is about to undo almost a decade of gains.
According to the World Bank, the pandemic is about to push about 31 percent of the population living on an income of between $1.90 and $3.20 a day into extreme poverty. The workers who have returned from India are jobless now, and some of them are returning to cities in India with high Covid infection rates. The unemployment rate is soaring which is engendering poverty. People at the bottom of the middle-income segment are now effectively poor due to losses in business and jobs in the private sector economy. This reality is further widening the income gap. There is fear that the economy could fall into a K-shaped recovery widening the income gap—making the poor poorer like never before.
Government agencies have tried to ameliorate the private sector economy through monetary and fiscal policies, but they are not sufficient to get the economy back to the pre-Covid-19 level. One of the building blocks of the Nepali economy, the agricultural industry, is also revealing a gloomy picture. Farmers are not getting buyers for their products, the government is failing to provide them with fertilisers, seeds and pesticides, and the supply chain is heavily disrupted. If due care is not given on time, the knock-on effects are yet to be felt. Therefore, the current rosy picture presented by the central bank neither reveals a recovery phenomenon nor the fact that the economy has a strong foundation. It is like an individual with a normal sugar level and blood pressure, but insidiously worsening lungs due to the Covid-19 inside him.
What do you think?
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