The Pulse | Economy | Politics | South Asia

COVID–19 Imperils Nepal’s High Economic Ambitions

Nepal was rebuilding its economy since 2016 and aimed to achieve a target growth of 9.6 percent. That won’t happen anymore.

By Arun Budhathoki for
COVID–19 Imperils Nepal’s High Economic Ambitions
Credit: MShades / Chris Gladis

Nepal achieved economic growth of 7 percent for the last three years, with an official target of 8 percent in 2020, but the global pandemic shock looks to derail Kathmandu’s plans. The global scenario shows that Nepal is not immune to the havoc that the global coronavirus pandemic can create; its economy is not shock-proof. The Himalayan country is now under nationwide lockdown until April 27th, with international and domestic flights suspended until April 30th.

Nepal had only achieved an average economic growth of 4.4 percent for two decades until 2015 due to political instability, low electricity production, and lackluster foreign investment. Post-2015 the country has witnessed a spike in reconstruction aid, high electricity production, and an increase in big infrastructure projects. But the contribution of remittances from Nepalis working abroad cannot be overlooked, as this has led to healthy growth in the service sector. The global pandemic is likely going to affect the service sector of Nepal, which contributes some 57 percent of the country’s GDP. On the other hand, Nepal’s tourism sector contributes just 2.1 percent percent to GDP.

The government’s recently endorsed 15th periodic plan on March 2 by the National Planning Commission (NPC) envisioned achieving an economic growth rate of 9.6 per year in the next five years. The periodic plan also included 22 national pride projects, 18 transformative projects, and 177 high priority projects. The 15th periodic plan also set a target of increasing the national per capita income from $1,047 to $1,595 within the next five years and to $12,100 within 25 years.

The periodic plan also envisioned achieving 5.6 percent per year agricultural growth in the next five years and 17.1 percent for the industrial sector. The commission also calculated that there would 9.9 percent growth in the service sector until 2024. The service sector is expected to contribute 57.6 percent to the national gross domestic product (GDP), with the agricultural sector contributing 22.1 percent, and the industrial sector only contributing 20.3 percent. On the other hand, Nepalis who work in the Middle East and Southeast Asia contribute as much as 30 percent of GDP through remittances. The impact of the pandemic will be seen in all these sectors, pushing back Nepal’s dream of rapid growth.

The Himalayan country only has had a handful of confirmed positive cases so far. Despite having a proximity with two emerging giants, China and India, Nepal has been lucky to see the trajectory of the pandemic remaining low within its borders. In these difficult times, China has come to the forefront helping the landlocked nation by donating medical supplies.

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Kathmandu’s growing closeness with Beijing begun when India, displeased with Nepal’s new constitution, imposed a six-month-long unofficial economic blockade on Nepal after a major earthquake in 2015, prompting the current Prime Minister K.P. Sharma Oli to sign trade major agreements with China, hoping to lessen its dependency on the southern neighbor. The move, perhaps, turned out to be a boon for the country as Nepal was able to achieve six-percent-plus economic growth from 2016 to early 2020. The heavy involvement of China in various infrastructure projects and India’s relaxed stance on Nepal contributed to quick economic growth in Nepal. Even so, it is imperative to understand that Nepali workers in foreign lands have also contributed significantly to the country’s isolated economy.

Nepal’s heavy dependence on remittances is likely to impact its economy as the world economy heads toward an uncertain future, including a probable recession. The country sends workers in significant numbers to as many as 14 countries in the Middle East and Southeast Asia and any sort of disruption in international travel for a long time is going to push the country into an unprecedented scenario.

The Asian Development Bank (ADB) recently forecast India’s economic growth to slow down to 4 percent for 2020-21 and the growth in other South Asian countries would likely decelerate to 4.1 percent in 2021 and jump to 6 percent in 2022. On the other hand, China is expected to witness 2.3 percent economic growth this year and 7.3 percent next year. The ADB had forecast 6.3 percent economic growth for Nepal in 2020, which traditionally is heavily dependent on India. After revising its estimates, 5.3 percent appears more realistic now with a jump to 6.4 percent in 2021. This turnover, perhaps, will push the country further to increase its economic ties with China.

Not all is gloomy in Nepal’s future economic prospects. The country is poised to finish two regional international airports in Pokhara and Bhairawaha this year and the completion of 456-megawatt Upper Tamakoshi Hydroelectric Plant will also contribute to the steady economic growth of the country. But the country struggles with rampant corruption. This, perhaps, is more dangerous to Nepal’s economy at the current scenario than the coronavirus pandemic.

Amid the economic shakeup in Nepal, geopolitics will once again play a role in how neighboring countries like China, the United States, and India approach the communist-led nation. India’s economic blockade and the 2015 earthquake had harmed Nepal’s economy and saw an increase of 3 percent in the poverty rate. But Nepal’s resilient nature saw the economy jump to 8 percent economic growth next year.

For a small country like Nepal whose GDP is just $30 billion, the impact of the coronavirus or any other disasters on its economy are often limited to a negative effect amounting to 0.5 to 1.5 percent of GDP. In a volatile time like this, Nepal should look up to China to finish the Chinese-funded infrastructure projects and also to revolutionize its various sectors as it works toward achieving the UN Sustainable Development Goals (SDGs).

Nepal, on the other hand, needs to improve its capacity to deal with future disasters both within and without, while continuing its infrastructure projects, and aiming to restart Visit Nepal 2020 tourism campaign in 2021. The country needs to continue its focus on decreasing the poverty rate from 18.0 percent to 9 percent, managing Nepali laborers who depend on foreign countries for work and income, and carefully dealing with the inflation that is set to increase to 6 percent from 4.6 percent. The country also needs to focus on decreasing its trade deficit, improving its infrastructure to deal with erratic Monsoon, focusing on how to tackle external instability in the view of an extended pandemic, and resetting its agricultural and industrial sectors. In short, it needs to become self-reliant.

Nepal’s economic growth is not expected to slow down as the northern borders with China are still open and, although borders with India are sealed, the continuous trade flow is not halted. India is under a continuing lockdown and with its shaky economy, Nepal could be possibly China-locked in terms of development in the coming weeks and months. In a geopolitical sense, China might be winning Nepal finally, while Kathmandu is left to deal with its neighbor and own economic aspirations.

Arun Budhathoki is a journalist with Stories Asia.