With festival season close, bank loans for imports halve, bankers’ data showsLow spending outlook around Dashain clearly suggests that Nepal’s economy, 82 percent of which is driven by consumption, will continue to slide, economists say.
Prithvi Man Shrestha & Sangam Prasain
In the first two months of the last fiscal year, NMB Bank had issued letters of credit, or LCs in common usage, worth Rs6.5 billion. During the same period this fiscal year, it has issued them worth just Rs3.5 billion.
Most of the letters of credit issued in these two months are to import goods targeting Dashain and Tihar festivals, according to Sunil KC, the bank’s chief executive officer.
In normal times this is also the period the country's commercial banks would be busy issuing loans particularly for importing goods for consumption during the festivals. But loans too have gone down in the face of the Covid-19 pandemic.
Commercial banks have lent just Rs21 billion during this period, down from Rs54 billion in the same period last fiscal year, according to Nepal Bankers’ Association.
Issuance of letters of credit and lending for imports grows just before Dashain assuming that people spend lavishly and consumption grows several times compared to other times.
Letters of credit are bank guarantees that a buyer’s payment to sellers will be received on time and if the buyer is unable to make payment on the purchase, the bank is required to cover the due amount.
“Based on the issuance of L/C in our bank and overall lending, I don’t think there will be as much consumption this Dashain as in the past years,” said KC.
People consume more food during the festival season than at other times and they purchase new items including garments, footwear, electronic goods and automobiles, according to economists.
The Nepal Automobile Dealers’ Association auto show, held before Dashain every year, attracted 80,000 visitors and did business worth Rs5 billion last year. But this year the show has been postponed because of the Covid-19 pandemic and may be held in February, according to Surendra Pradhan, chief of the Association’s secretariat.
Economist Keshav Acharya predicts that consumption of almost everything will go down this year due to two factors: reduced income of people and reduced movement of people compared to previous years.
A central bank study showed that registered firms alone laid off 22.5 percent of their staff and cut wages by 18.2 percent on average. A large number of people have jobs in the informal sectors too.
In fact, the World Bank has projected that nearly one-third of people who are just above the poverty line could slip below the line due to the pandemic. “An estimated 31.2 percent of the Nepali population who live close to the poverty line [between $1.90 and $3.20 a day] are at high risk of falling into extreme poverty,” the global lender said.
The Bank has predicted that Nepal’s economy in the current fiscal year may contract by 2.8 percent, and this economic contraction would risk exacerbating poverty, inequality and food insecurity because of a large informal economy.
“Due to the lockdown imposed by the government, many people lost their jobs in the formal and informal sectors and their ability to purchase things has decreased, which will affect the Dashain consumption,” said Acharya. “On the other hand, there won’t be mobility of people from the city, the villages and from abroad to Nepal like in previous years due to psychological terror created by Covid-19, which will affect transport services and the hotel and restaurant sector.”
Transport entrepreneurs said there won’t be much travel for Dashain festival from the urban centre to the villages as many people have already moved to their villages in one way or another.
“Most of them have stayed in their villages. Therefore, there will not be a rush like in the past years,” said Saroj Sitaula, a transport entrepreneur.
After the government reopened long-haul transport services from Thursday, he said, many people are expected to move out early considering potential crowding just ahead of Dashain.
According to him, over two million people had moved out of Kathmandu last Dashain.
The movement of people across the country brings business to the restaurants and hotels along the highway and provides employment for thousands but this will be reduced too this year.
“Consumption of goods and services during the Dashain festival brings dynamism in the economy,” said Acharya, who is also a former chief economic adviser to the finance minister. “But this will not happen in the Dashain festival this year.”
Consumption is the key driver of the Nepali economy, contributing 82 percent to the gross domestic product.
Ever since the government imposed the lockdown on March 24, people’s mobility has been greatly affected. Even though the lockdown was officially lifted on July 21, it remained in place in different covers in most parts of the country, affecting consumption of goods and services.
The government allowed resumption of international flights from September 2 for mostly foreign diplomatic staff and representatives of international agencies. Domestic flights, long-haul public transportation service and hotels and restaurants started operations on Thursday despite coronavirus cases rising rapidly. As of Friday, there have been 61,593 cases of coronavirus infections, with 2020, the highest single-day spike so far, on Friday. The death toll stands at 390 with seven more deaths reported on Friday.
“Reopening of economic sectors will increase movement of people to some extent and subsequently increase demand for goods and services,” said Gunakar Bhatta, spokesperson for the Nepal Rastra Bank. “But it is clear that consumption will not be as much as last year.”
Despite the reopening of markets, people will not go shopping as in normal times unless it is essential, said Bhatta.
While people consuming little is a concern for the economy, consumers may not get the goods they want in the market with importers struggling to bring in goods due to domestic and international travel restrictions.
For instance, Nepal gets most of the garments, footwear and electronic goods from China to meet the festival demand. But importers say nearly 2,000 trucks ferrying goods have been stuck in Kerung, Khasa and Lhasa since China has closed the Rasuwagadhi and Tatopani border crossings for the last several weeks.
According to Bachhu Poudel, president of Nepal Trans Himalaya Border Commerce Association, a grouping of traders involved in Nepal-China trade, cross-border movement of goods has been halted for the last three years through the Tatopani border while the Rasuwgadhi border point has remained closed for a month.
“We already had 1,200 trucks stuck in the bordering Chinese town. Another 800 trucks were added after two borders reopened and then closed again,” said Poudel. “Now we don’t have money to import any more goods even by the sea route from China.”
Nepal closed its borders in January after the spread of the coronavirus in China. As a result, 1,200 trucks got stuck on the Chinese side of the border. The Tatopani border was opened in early April and the Rasuwagadhi border in July. Hoping that the movement would be smooth, importers ordered more goods, only for the border to be closed again as coronavirus cases grew.
There is, however, some hope that remittance will not be affected much before the festival, which could help increase consumption if the recent trend is anything to go by.
In the last fiscal year 2019-20, remittance inflow defied expectations as it decreased by just 0.5 percent to Rs875 billion against the projection of a 15 to 20 percent drop, according to the central bank.
In the last several years, remittance has been fueling consumption and whether the country would receive remittances like in the past is uncertain.
According to Bhatta, spokesperson for the central bank, remittance appears to have slightly increased during the first month of last fiscal year compared to the same month last fiscal although data are yet to be processed.
Economists, however, say that given the current global recession, there is uncertainty whether remittance would be received as usual in the coming months.
Any reduction in remittance will also affect the country’s consumption pattern, economists said.
“Low consumption during this festival season will affect overall economic growth this fiscal year,” said economist Acharya. “The government has targeted a seven percent growth this fiscal year but it will be hard to achieve even meagre growth this fiscal considering the current state of the economy.”