ADB downgrades economic growth due to earthquake
The country might see the economic growth to plunge to between three per cent and 3.5 per cent, according to the Asian Development Bank (ADB).
Though, estimating the exact economic cost will be an ongoing process, the initial estimation shows that the country might see lower growth from previous estimation of 4.5 per cent, it added.
The new estimation could be around 4.2 per cent, the ADB said, adding that the growth forecast may be further downgraded to somewhere between three per cent and 3.5 per cent, if the supply-side disruptions intensify in the coming weeks.
However, gross domestic production (GDP) growth is expected to rebound strongly in the next fiscal year 2015-16 given that a forecast of a better monsoon than the current fiscal year should boost agricultural output and the anticipated accelerated expenditure on rehabilitation and reconstruction should boost economic activities.
Though, in the short run, capital spending will be slow due to the significant disruption in labour and financial flows, and contract awards, it might zoom up – in the medium term – due to a lot of reconstruction work post earthquake. The reconstruction work will circulate lots of money in the market that could also push the economic growth up.
In March, ADB had projected 4.6 per cent growth for the current fiscal year 2014-15.
The 7.8-magnitude earthquake that rocked Nepal on April 25 and the many subsequent aftershocks have imposed a huge human and economic toll on the country, with over 5,000 deaths and some 11,000 injured. Millions others have been affected in various ways.
Roads, bridges, water supplies, schools, hospitals, and homes in the main cities and in rural areas across more than two-thirds of the country's 75 districts have suffered damage. Major roads to neighboring countries still seem usable though.
Production activities – especially in the service sector – have been severely disrupted by the earthquake mainly due to damage to physical infrastructure and distribution networks. Travel and tourism is likely to be badly hit with most key hotels shutting down for the coming few weeks in order to examine the structural integrity of their buildings. Although this sector’s direct and indirect contribution was only about nine per cent of GDP in the last fiscal year, it is one of the fastest-growing sectors and has significant backward and forward linkages in terms of employment and production.
The impact of the likely drop-off in tourism will be significant for the current fiscal year as the beginning of the mountaineering season also was hit by the avalanche at Mt Everest due to earthquake. In addition, banks and financial institutions are only partially operating, which will restrict the credit supply to businesses and households.
The resource hit country might also see increase in poverty as most of the populace will likely fall back below the government’s national poverty line of rs 19,261 per person per year (average 2010-11 prices), it added. "It is particularly the case in rural areas, where 27.4 per cent of the population lives below the poverty line." Overall, 25 per cent of the population lives below the poverty line, according to the Central Bureau of Statistics (CBS).
The economy had grown by an estimated 5.2 per cent in the lats fiscal year 2013-14, highest rate since the global recession.
Inflation to increase
Due to supply side constraints following the earthquake, the inflation might be edging
up to eight per cent in the current fiscal year, though, ADB in March had projected inflation to moderate to 7.7 per cent for the current fiscal year 2014-15, down from 9.1 per cent in the last fiscal year 2013-14. "Food inflation is expected to remain in double digits as a result of high prices of cereal grains and vegetables following to the earthquake," it said, adding that a shortage of fuel and higher transportation costs may also cause non-food inflation to edge upward. "Inflation is expected to tick down to around 7.3 per cent in the next fiscal year 2015-16, after the shortage of food and non-food items has eased.
The ADB projected that remittance inflow to increase immediately following the earthquake. But potential migrant workers might defer travel and instead stay with family members and migrant workers might come back to take care of family matters, which could hit the remittance inflow in the next fiscal year.
The ADB prescription for the government:
• Manage relief and logistic operations effectively.
• Smoothen institutional coordination in both the relief and reconstruction phases.
• Conduct a detailed needs assessment of the rehabilitation and reconstruction of physical infrastructure and a corresponding timeline of events and milestones to fully utilize internal and external assistance.
• Ensure good governance of the relief and reconstruction efforts.
• Focus the next fiscal year's budget on relief, rehabilitation and reconstruction.
• Continue ongoing and planned reforms to increase private sector investment.