Impact of Covid-19 on Nepalese Economy

Programme Name: MBA

Course Code: ECON 5501
Course Name: MANAGERIAL ECONOMICS
Group (D) Assignment

Date of Submission: 4th June, 2020

Submitted By: Submitted To:

Group: D Faculty Name: Sunil Kharel

Semester: 2nd semester Department: MBA
Intake: December 2019
Impact of Covid-19 on Nepalese Economy

Group D Group Member’s Question for Group

Name

1 Suraj Ban We are facing a joint health and economic crisis of

unprecedented proportions in recent history due
2 Simon Shrestha to COVID-19. In such circumstances what may be
the impact on Nepalese economy. Also highlight
the policy that should be framed by state.
3 Srijana Gurung

4 Sumee Shrestha

5 Sushista Tuladhar

6 Sumitra Basnet

7 Yathartha Joshi
Impact of Covid-19 on Nepalese Economy

1. INTRODUCTION
Coronavirus disease 2019 (COVID-19) is an infectious disease caused by severe acute
respiratory syndrome coronavirus 2 (SARS-CoV-2). It was first identified in December 2019
by Wuhan Municipal Health Commission, China. The officials confirmed a case of COVID-
19 in Thailand, the first recorded case outside China. Now, the pandemic has been seen or
reported by many countries around the world.

In Nepal, the first case of COVID-19 pandemic confirmed was 23rd January 2020, who had
returned from Wuhan. The Nepal Government has initiated a lockdown from 24th March 2020.
During lockdown, most of the business houses are closed. Governmental organizations are
operated with preventive measures with a limited number of employees at once. Financial
institutions are operated on an alternative basis with few numbers of employees and branches
defined in their website. Work from home and online classes are taking place nowadays. The
decision of lockdown or state of emergency has brought some mental or psychological issues
as well physical issues.

On the contrary of COVID-19, most of the countries has closed all the sectors of economy such
as manufacturing, service, educational, financial institutions, etc. This has led people to be
locked in their own home. The demand and supply of products and services has been largely
affected other than products such as groceries, dairy etc. Being inside home, people have
involved themselves into social media, ecommerce, etc. The online shopping and payment is
increasing nowadays. Since people are not allowed to go out, they prefer online shopping or e-
payment. Online classes are happening but it may not be feasible to all students. People who
work on daily wage to get basic goods are highly affected by the COVID-19. Since they do not
have work, they do not have money to fulfil their basic needs.

The UN’s Framework for the immediate response to the COVID 19 crisis warns that “The
COVID-19 pandemic is far more than a health crisis: it is affecting societies and economies at
their core”. As stated, this pandemic has brought two concurrent crises i.e. health and economic
crisis engulfing the world.
Impact of Covid-19 on Nepalese Economy

2. Impact on Global Economy

The outbreak of pandemic COVID-19 all over the world has disturbed the economic, social,
political, religious and financial structures of the whole world. The spread of virus encouraged
social distancing which led to shutdown of financial market, corporate houses, business and
events. Every country is introducing and adopting restrictive measures, monetary policy
measures, fiscal policy measures and public health measures. The impact of social distancing
cannot be measured right now, since this impact can be seen in the future as well.

Social distancing had made greater impact on economic activities and stock market indices. All
the businesses are shut and people are staying at home. The economic activities are completely
closed. There is no market open for trading which leads to no income for business houses and
no salary for the job holders. The money is not circulating in the market. Since it is still
spreading and end of this pandemic can’t be seen near.

The exponential rate at which the virus is spreading and heightened the uncertainty of about
how bad the situation could get, led to flight to safety in consumption and investment among
the consumers, investors and international trade partners. The increasing number of lockdown
days, monetary policy decisions and international travel restrictions severely affected the level
of economic activities and the closing, opening, lowest and highest stock price of major stock
market indices. According to (Petersoon & Thankom, 2020) “The imposed restriction on
internal movement and higher fiscal policy spending had a positive impact on the level of
economic activities, although the increasing number of confirmed coronavirus cases did not
have a significant effect on the level of economic activities”.

The policy of “Stay-at-home” was adopted to control the spread of virus, but it has planted the
seeds of recession in developed countries. The International Air Transportation Association
(IATA) stated that the air travel industry would lose US$113 billion if this pandemic is
contained quickly. The tourism industry was highly affected since people cannot travel for the
period. Financial Times (2020) stated that “There is general consensus among economist that
the coronavirus pandemic would plunged the world into global recession”.
Impact of Covid-19 on Nepalese Economy

3. IMPACT ON ECONOMY
The strict lockdown to contain the spread of Covid-19 and supplies disruptions are wreaking
havoc on the economy. It is going to push many vulnerable households below the absolute
poverty line and will likely increase inequality.

a) Before the pandemic disaster, 7.1 percent growth was expected as per ADB due to
accelerated post-earthquake reconstruction process, favorable monsoon season for food
production, regularity of electricity supply, increased in tourist visits and increased remittance.
All these main suppliers for GDP growth will be affected in 2020 due to COVID-19.

b) Inflation rate is on average 5.6 percent in FY 2019 with annual average of 4.2 percent,
however there will be increased in food price in 2020 because Nepal is more dependent on
agricultural products on India.

c) Capital expenditure is backbone of national development but Nepal is more focused on

construction of infrastructure projects at the end of FY. At this last quarter of FY, capital
expenditure is affected. The monetary policy will not be able to make the interest rate stable as
per the plan.

d) Weak capital spending and the lack of an investment-friendly environment affected

industrial output before the pandemic. The Covid-19 outbreak in Nepal happened to exacerbate
the situation as it hit in the second half of the fiscal year—the period when a majority of
economic activities occur.

e) Deceleration of remittance income and decline in imports were already affecting retail and
wholesale trade, which has the second-largest share in the GDP. After the pandemic, this sub-
sector is expected to grow by just 2.1 percent, down from 11.1 percent last fiscal.

f) Since a large proportion of the households are clustered just above the absolute poverty line,
an income shock due to the Covid-19 will push many of them below the poverty line. It will
also potentially widen inequality because the poorest households are disproportionately
affected.

Sectoral Wise Economic Impact

A) Manufacturing Sector:

➢ Nepal’s manufacturing industries mostly rely on raw materials from China, India and
Singapore. The knock-on effects for Nepal are significant as the supply of raw materials
from China will be reduced drastically.
➢ The domestic supplies and that from imports both will suffer and will have an impact
on availability and cost increment.
➢ Industrial output will be depressed due to lack of raw materials and restrictions in the
transport area.
➢ Will have impacts on working capital needs during lockdown, will also have an impact
on supply chain, future investments and expansions.
Impact of Covid-19 on Nepalese Economy

➢ Export of garment and carpets are expected to suffer as they depend largely on Europe
and USA.

B) Remittance from Foreign Employment:

➢ Remittance income will be severely affected due to COVID-19 pandemic. The income
has fell by 0.5% per annum in mid-February 2020 after rising by 16% for the same
period in the earlier year as per report published by NRB.
➢ Remittance income of about NPR 879.30 billion per fiscal year, which is 25% of GDP,
is one of the major sources of foreign earnings. A sharp decline of remittance will
undermine Nepal’s external stability.
➢ GDP growth will likely moderate to 5.3% in FY 2019/20 down from 7.1% a year earlier.
➢ During the first seven months of current fiscal year i.e. FY 2019/20, Nepal has received
remittance of NPR 513.20 Billion.
➢ With the fall in remittances, growth in deposit collection by banks nationwide will
decline.
➢ All these restrictions will not only hurt Nepalese migrant's workers but also the
country's remittance dependent economy as a whole. The possible downturn in
remittance could thus have a severe impact on overall consumption in the country.
➢ Although the effect of the pandemic on the flow of remittances is yet to be seen, the
bans and restrictions are likely to soon show negative impacts on the money workers
send home.

C) Food and Agriculture Sector:

➢ Vendors from various vegetable markets have been refusing to keep the food brought
from India and the border side in fear of the virus, so this has resulted in an increase of
price of vegetables like potato and onion.
➢ Supply of egg, meat and meat products have declined drastically, especially in city areas
causing a severe impact in poultry farming, animal husbandry and fisheries of nation.
➢ With most people purchasing essentials only during the pandemic, supply of bakery
items and dry fruits has rapidly gone down.
➢ Since the movement of people from one district to other has been banned for more than
a month, shortage of labor will be visible in production and processing of various
agricultural products.
➢ Commodity prices particularly of food and beverages has risen on account of supply
chain disruptions.

D) Banking and Finance Sector:

➢ Credit Management

The cash flow of many consumers and businesses will collapse as lack of demand flows
through into lower business revenues and employee layoffs. These in turn will cause an
Impact of Covid-19 on Nepalese Economy

increase in non-performing loans as the borrower struggle to make scheduled interest and
payment and non-renewal of revolving loans on timely basis

➢ Trade Finance Management

The cross-border transaction is halted except for some necessity items which may cause
difficulty to the exporter to ship goods in a timely manner. It may also be difficult to
forward the Trade Finance documents to the bank. There may be payment delays.

➢ Revenue Compression

In the first few weeks of the pandemic the banking industry market value fell to a lower
level than during the 2008/09 crisis.

➢ Retail financing industry, which was one of the key drivers of credit growth will be
impacted for at least two quarters, as the demand for housing assets, consumer goods
and working capital financing will get hit due to general slowdown in economic
activity.

E) Consumer and Retail Business:

➢ The e-commerce sector will face the challenges due to COVID-19 and may see a dip in
growth. There will be increased pressure on supply chain for deliveries of products and
another challenge for e-commerce companies is that they will need to equip their
employees with the appropriate resources to manage operations remotely with little or
no disruption.
➢ Inventory turnover is likely to be disrupted while funding gap continues to expand.
➢ For most retailers/consumers goods companies, there is an immediate pressure for them
to focus on managing excess inventory caused by a dip in consumer spending,
especially for items with a shorter shelf life.
➢ On the contrary, certain popular commodities, such as dis infection products and instant
food, may be out of stock. This has presented challenges to them trying to maintain
stable supply of these commodities.
➢ As per the Nepal Macroeconomic Update Volume 8, No .1 April 2020, Food inflation
increased by 9.8% y-o-y as of mid-February 2020 with significant increase in the prices
of vegetables, spices and alcoholic beverages.
➢ Food prices elevated owing to late monsoon and disruption in supply channel. The
temporary closure of international borders over COVID-19 concern has already nudged
up food prices.

F) Tourism & Aviation Sector:

➢ Tourism and travel are one of the worst hit sectors on account of COVID-19 crisis.
➢ With the suspension of Nepal Tourism Year, 2020 the expectation of inviting 2 million
tourists and substantial growth in this sector has been heavily impacted.
Impact of Covid-19 on Nepalese Economy

➢ Cascading adverse effect on Labor Market is expected, suspension of on-arrival Visas

and Everest expedition alone to cause around 20000 job losses among trekking and tour
guides while low occupancy in hotels, restaurant to cause layoffs.
➢ UNWTO estimates international tourist arrivals could decline by 20% to 30% in
2020.This would translate into a loss of 300 to 450 US$ billion in international tourism
receipts (exports) – almost one third of the US$ 1.5 trillion generated globally in the
worst-case scenario.
➢ The airlines booking has sliced drastically and the domestic tourism has also been
affected the same way.
➢ The foreigners have cancelled their bookings and it directly impacts the aviation
industry of Nepal this year. The effect in the industry could last as long as six months.
➢ The latest research from World Travel and Tourism (WTTC) estimates that up to 75
million jobs are at immediate risk.
➢ WTTC also estimates that a staggering one million jobs are being lost every day in the
Travel and Tourism sector due to the sweeping effect of the coronavirus pandemic.
➢ The construction of Pokhara International Airport and Gautam Buddha International
Airport are being greatly affected due to the absence of Chinese workers. These projects
are built by Chinese firms and the majority of their staff are Chinese nationals.

G) Telecom Sector:

➢ Telecom is one of the most essential services as defined by the government and is one
of the key enablers to fight against COVID-19.
➢ Internet Service Providers are facing difficulties complying with Government
Instruction of 25% discount during lockdown period on account of increased cost of
Network and Bandwidth maintenance in light of surge in demand while the no. of
subscription and related fees remain the same.
➢ Telecom sector is witnessing a sudden surge in demand on account of enforced
lockdown and concept of work from home.
➢ Telecom companies are required to use a combination of tools like Fair Usage Policy,
educating responsible use, use of AI for load balancing along with increase in Cyber
Security Measures to address the demand of Work from Home practices.
➢ Telecom service providers need to address the demand of data privacy and cyber
security in the recent light of breach in personal data of users and breach of privacy
trust by industry leaders in technology.

H) Transportation Sector:

➢ Major infrastructure projects are to be delayed which leads to time and cost overruns
during the project development.
➢ Across the transportation and logistics asset utilization are expected to reduce in short
term
Impact of Covid-19 on Nepalese Economy

➢ Low demand for logistics and transport to put downward pressure on prices across
various transportation and logistics sub sectors like warehousing, freight transportation.
➢ Labor forces are impacted to low extent as the transportation sector being an essential
sector. However daily wage earners are impacted in short to medium term.
➢ Revenue impact of cab aggregators as passengers are reduced significantly
➢ A surge in private transport is anticipated as people have become wary of public
transport due to perceived potential health risks.

I) Health Sector:

➢ Expansion in capacity during the period will result in high utilization of labor in short
term. Gradually the asset utilization will fall the situation becomes normal.
➢ Excess expenditure of budget on medical services resulting to hamper other
development projects.
➢ As an essential sector, labour shortage to be faced in short term due to the current
pandemic.
➢ Insurance sector to be affected as claimants to rise during this period. This sector also
to be benefited positively in short term as insurance of all the medical staff to be done
till 15 July 2020.
➢ Medical equipment and drugs to be in short supply as price is also likely to rise in short
to medium term.
➢ Normal health care services to be affected in short term as threat due to pandemic.
➢ Supply and distribution of essential medicines, sanitizers and PPEs (masks, gloves etc.)
are impacted; also, there is a production slowdown due to raw materials and ancillaries
not reaching factories.

4. Key Policy Recommendation on the Basis of Sectors

A) Manufacturing Sector:
➢ No Fines/Penalties should be levied owing to delays in filing of statutory returns. I.e.
VAT, tax returns, social security such as PF, Gratuity etc.
➢ The banks may be directed to provide funds to ease out the working capital requirement
and monthly expenses related to utilities, paying of wages, etc.
➢ Develop automation solutions to reduce the number of workers on the factory floors.
B) Remittance from Foreign Employment:
➢ Increase in time period for repayment of principal amount and payment of interest
amount of loans related to foreign employment for the period most affected by
pandemic worldwide.
➢ Quick arrangements to bring Migrant Workers back to Nepal from worst hit countries
by pandemic.
Impact of Covid-19 on Nepalese Economy

➢ Development of concrete fundamental framework so that people's right to employment

is realized.
➢ Immigrant Labour Agreement shall be signed and renewed more in favour of Nepal.
➢ Youth and Small Entrepreneur Self Employment Program to be implemented
effectively.
➢ Focusing on the domestic economy and creating jobs at local level, heavily investing
in infrastructure development as well as readdressing the agricultural sector.
C) Food and Agriculture Sector:
➢ Strict regulations be implemented in major vegetable markets and retail shops of
crowded places to prevent unnecessary price hikes and black marketing.
➢ Arrangement of pass and means of transport to farmers and producers to bring products
into market and grant of 25% of transportation expenses as decided by meeting of
Ministry of Agriculture and livestock Development dated 29 March 2020.
➢ Health and life insurance of personnel delivering the goods of basic needs during the
pandemic be done.
➢ Incentives for working during the crisis be provided to personnel.
➢ E-commerce based apps to be encouraged to deliver goods to households to minimize
mass public interaction.
D) Banking and Finance Sector:
➢ Supervisors should clearly communicate to banks to be proactive in rescheduling their
loan portfolio for those borrowers and sectors that have been hard hit by the severe, but
temporary, shock.
➢ They should also remind banks about flexible credit risk management and the
accounting standards for impairment in these situations.
➢ Encourage continuous dialogue between supervisors and banks, especially in this
unprecedented situation of working remotely with colleagues, customers, and
supervisors.
E) Consumer and Retail Business:
➢ Easing Financial Stress in the Sector
➢ Payment deferment or interest waivers or special rebates to ensure that micro/small
retailers have cash flows to pay workers and suppliers –
➢ Banks could extend credit limits for small retailers.
➢ Digital payment should be prioritized in order to enable easy and COVID19 risk free
transactions.
Impact of Covid-19 on Nepalese Economy

F) Tourism & Aviation Sector:

➢ Reduction in Airport Charges especially in domestic tourism.
➢ Government should reduce the investment cost of the airline companies by reducing
value added tax on spare parts and aviation turbine fuel (ATF).
➢ Business continuity must be addressed from a total airport perspective, looking at not
jot airport operation but also other service providers-including security services, ground
handlers, retailers and catering companies.
G) Telecom Sector:
➢ Subsidize ISPs to provide the declared discounts.
➢ Encourage responsible use of the Internet especially during peak hours.
➢ Use of AI for load balancing, and management of additional bandwidth on a temporary
basis.
➢ Manage seamless onsite service and availability of recharge coupons to consumers
➢ Enhance cyber security and cloud services.
H) Transportation Sector
➢ Fair and transparent pricing of all the relevant transport and logistic services through
price caps.
➢ short term tax benefits can be given
➢ Policy support and standardization for hygienic travel through establishment of health
desks at the major bus stations.
I) Health Sector:
➢ Special permission and clear rules for transportation and manufacturing of raw
materials and ancillaries required
➢ Reduced import duty on huge machineries and other dutiable drugs
➢ Policy on social distancing and digital payment to be made compulsory
➢ To ensure the availability of essential medicines

5. References
Petersoon, O., & Thankom, A. (2020). Spillover of COVID-19: Impact on the Global
Economy. SSRN Electronic Journal.
Koirala, J., & Acharya, S. (2020). Economic Impact of COVID-19 in Nepal: A Question of
Bad or Worst. SSRN.
REANDA. (2020). Potential Impact of COVID-19 on Nepalese Economy.
Impact of Covid-19 on Nepalese Economy

https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#N