Nearly two weeks after the government set an ambitious target of achieving a 7 percent growth rate for the upcoming fiscal year, the World Bank on Monday forecast Nepal to grow at a markedly lower rate of 2.1 percent, a more realistic projection, say economists.

The June 2020 edition of the World Bank’s Global Economic Prospects released on Monday projects Nepal’s economic growth to decelerate to a dismal 1.8 percent this fiscal year, which ends in mid-July, due to pandemic-related disruptions, including mitigation measures and sharp falls in exports and remittance inflows.

According to the report, Nepal and the Maldives in South Asia will be hardest hit by a drop in tourism.

In contrast to Finance Minister Yubaraj Khatiwada’s optimistic target of 7 percent, the bank has painted a grim picture of Nepal’s economic growth for the fiscal year 2020-21, stating that Covid-19 outbreaks in most advanced economies appear to be abating, but the pandemic is rapidly spreading across low-income countries like Nepal, where health care systems are poor.

“There is a risk that the pandemic will trigger a long-lasting rise in poverty, especially among the low-income countries of the region. The region has a high share of workers employed in the informal sector, which adds to the health and economic challenges of dealing with the pandemic,” the report said. “Should supply disruptions give rise to sharp and pervasive rises in food prices, more people could face food insecurity.”

Economists say that the World Bank’s forecast is more realistic than the government’s, given that the existing economic depression will spill over into next fiscal year and could continue for longer, even if the lockdown is eased or lifted. That’s because the government has not focused on an immediate recovery plan, which is likely to lead to long unemployment spells, they say.

“Key economic pillars—agriculture, tourism and manufacturing—are all badly hit and this pessimistic momentum will continue in the next fiscal year or longer,” said economist Bishwambher Pyakuryal. “If we are fortunate enough, the World Bank’s growth estimate for next fiscal year is realistic.”

Pyakuryal said that he had initially estimated that the country would encounter a V-shaped recession, where the economic slowdown is sharp but only lasts a few months and recovers quickly.

But now, he estimates that the recession is likely to be L-shaped, meaning a slow rate of recovery, with persistent unemployment and stagnant economic growth. In an L-shaped recession, recovery can sometimes take several years.

“There isn’t any solid ground for recovery in the service sector as there are likely to be long unemployment spells,” said Pyakuryal.

In the agriculture sector, the looming shortages of chemical fertilisers and seeds are likely to hamper production, despite the prediction of a normal monsoon. The government has significantly increased subsidies on chemical fertilisers—from Rs 9 billion to Rs 11 billion—but farmers are facing difficulties purchasing the fertilisers in the first place, due to shortages.

“The case of tourism is also depressing.” said Pyakuryal. “People won’t immediately travel.”

Many hotels teetering on the edge of bankruptcy have already decided to cut their losses by remaining closed for six months until November, as they don't expect tourists to visit Nepal for at least another year.

Economist Dadhi Adhikari said that it has become the norm in Nepal to inflate economic growth rates.

“No one believes the government’s economic growth rate estimates,” he said.

When most global economies are trimming their growth projections due to the economic depression caused by the Covid-19 pandemic, Nepal has bucked the trend, with Finance Minister Khatiwada setting a highly ambitious target of 7 percent growth when he presented the budget on May 28.

The Central Bureau of Statistics (CBS) has also projected that Nepal’s economy will grow at 2.27 percent this fiscal year, a massive deceleration from the government’s projected 8.5 percent target.

“The CBS estimates are based on the assumption that the lockdown will be lifted by mid-June and that economic activities will soon begin. But we are not optimistic that economic activities will begin anytime soon. In my view, this fiscal year’s growth could be at around 1 percent,” said Adhikari. “The World Bank’s estimates for the next fiscal year, however, seem realistic.”

Adhikari, who is also director for the South Asian Institute for Policy Analysis and Leadership, told the Post that the World Bank’s 2.1 percent growth projection is based on two factors—modest growth in agriculture and the government’s ‘kaam ko lagi khadyanna’ (food for work) scheme.

The scheme is expected to generate jobs and retain migrant workers who have returned home.

“But it will depend on how efficiently the local level governments will be able to implement the scheme,” said Adhikari.

The bank has projected India’s growth rate at a negative 3.2 percent in 2020-21, which could also impact Nepal as Indians constitute the largest tourist numbers in the country.

Besides, there are questions if foreign tourists will travel or be welcomed immediately, given the uncertainty created by the Covid-19 contagion. And if India goes into recession, tourists from India, Nepal's biggest source market, are likely to avoid traveling in 2021, as their purchasing power will dwindle.

“The drop in remittance and tourism income will put pressure on foreign currency reserves, and in fact, reduce consumption,” said Adhikari.

According to Adhikari, remittance is expected to drop 20 percent this fiscal year, and another 40 percent in the next fiscal year.

Despite the depressed economy, most countries in South Asia, including Nepal, are predicted to observe positive growth rates, though. India and Pakistan are the two economies expected to contract, with negative growths of 3.2 and 0.2, respectively, in 2020-21.

Industrial activity and services have plummeted sharply in South Asia as a result of pandemic mitigation measures and a collapse in global demand. Trade activity too has sharply fallen. Consumption is severely limited with nationwide lockdowns instituted in several economies, despite recent relaxations.