Several countries around the world have brought back social and travel restrictions as the Omicron variant continues to spread rapidly, raising fears anew among the Nepali private sector and the government about possible impacts on the fragile economy.

The greatest worry is that the emergence of the Omicron variant will increase inflation, insiders said. Spending, manufacturing and distribution are all likely to be hit with the attempts to prevent another wave of infections.

“The pandemic has raised inflation,” said Shekhar Golchha, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), addressing a conference entitled Post Covid Economic Revival here on Wednesday. “The rapid rise in inflation has significantly impacted small and medium enterprises.”

The private sector has forecast that due to the soaring inflation, Nepal’s trade deficit could reach a record Rs1.6 trillion by the end of this fiscal year in mid-July 2022.

Nepal’s total trade deficit swelled 56.8 percent to Rs568.17 billion during the first four months of fiscal 2021-22. The deficit had recorded a 12.5 percent year-on-year drop in the corresponding period of the previous fiscal year.

The import bill has ballooned because of a rise in global inflation, and this has put pressure on Nepal. During the first four months of 2021-22, the value of imports jumped by 61.6 percent to Rs650.29 billion, compared to a 10.6 percent decrease a year ago.

Golchha said the country was facing a liquidity crunch.

While the scars of the first and second lockdowns still remain, a potential third wave of the Covid-19 pandemic may drag down the economy from bad to worse, the private sector has warned.

“The revival of small and medium enterprises (SMEs) is important to boost the economy as they contribute 22 percent to the country's economy, and provide employment to 2.5 million people,” said Golchha.

"Half of the SMEs in Nepal are operated informally, and they are highly vulnerable to the emerging crisis," said Golchha.

The service sector too got burned by the Covid-19 pandemic, and it is still struggling to bounce back.

"More than 370,000 jobs in the tourism sector that contributed 7 percent to the country’s GDP, are still at risk,” said Golchha. “We have to make a special strategy to address these vulnerable sectors.”

Speaking at the FNCCI conference, Finance Minister Janardan Sharma too admitted that rising inflation looks set to trigger a massive blow. He said that the government was worried about the ballooning trade deficit, and added that it could be narrowed by consuming more electricity.

"Instead of selling electricity, we can reduce the tariff which will increase domestic production and create jobs. We have to focus on manufacturing.”

Sharma urged the private sector to submit proposals about how much electricity the manufacturing sector needs to boost production. “The government is ready to provide energy accordingly. We are prioritising export-oriented industries by creating a different policy,” he said.

Sharma said that the vaccination drive against Covid-19 has reached 25 percent of the population. “We have set a target to fully vaccinate the population by the end of mid-April.”

Sharma said that the country could produce mobiles and automobiles as the country possessed cheap labour, and electricity was available.

But the private sector is not happy with the government regarding several matters.

Golchha said that even though five months have passed since the new government took over, it has not been able to appoint a minister of industry, commerce and supply. “This shows how responsible the government is towards the development of industry.”

Golchha said, “Around 50 bills have been pending in Parliament, and its sessions are being obstructed every time. Lawmakers should be serious about the recovery of the economy.”

Despite a Nepal Rastra Bank report showing that 70 percent of small and medium scale enterprises, which were hard hit by Covid-19, are fully operated, they are facing problems of cash flow, the private sector says.

Industrial production and employment will not grow unless foreign investment increases, so it is important to improve policies including the country’s facilitation measures, insiders said.

The inflow of foreign grants in the last five months is almost zero. “We want the government to immediately pass the Millennium Challenge Corporation (MCC) compact which has been put in limbo,” said Golchha.

The $500 million MCC compact, a five-year grant programme of the United States, has become a politically divisive issue, as a section of political party leaders claims that the programme is part of the US-led Indo-Pacific Strategy aimed at "containing China".

Nepal signed the MCC compact in September 2017.

“It is not possible to realise industrial development and job creation if we are not able to create an environment for foreign investment,” he said.