Nepals Post-earthquake Economy: A Preliminary Outlook

Chandan Sapkota

Asian Development Bank

Nepal Resident Mission

Guest lecture at Apex College, Kathmandu, 3 June 2015

2015-06-03 1

The views expressed in this document are those of the author and do not necessarily reflect the

views and policies of the Asian Development Bank, or its Board of Governors, or the governments

they represent.

2015-06-03 2

Presentation Outline

1. Background

2. Post disaster needs assessment

3. GDP growth outlook

4. Inflation outlook

5. External sector outlook

6. Fiscal outlook

7. Immediate priorities

Source: ADB Nepal, https://www.facebook.com/adbnrm

2015-06-03 3

Source: https://adb.exposure.co/nepal-earthquake?home-topbox

Great Gorkha Earthquake: 7.8 magnitude earthquake struck Nepal on 25 April Over 270 aftershocks

o 6.7M on 26 April and 7.3M on 12 May

Mostly affected central and western administrative regions 14 districts declared as severely affected (primarily for effective and efficiency

rescue and relief operations)

About 40 districts affected

Over 8,600 dead, 21,000 injured

Over 0.5 million houses destroyed (99% private houses)

Roads, schools, health posts, farmland, livestock, food stock, seeds, etc damaged

2015-06-03 4

Background

2015-06-03 5

Post Disaster Needs Assessment

PDNA exercise is ongoing Led by NPC Supported by development partners

23 sectoral and thematic clusters

Expected to be completed by mid-June 2015 Clear idea on damages, losses and needs Sectoral recommendations & implementation guidance

Followed by an international donors conference on June 25

Preliminary estimates from various sources: $5-$10 billion

2015-06-03 6

GDP Growth Outlook

Earthquake struck in the tenth month of fiscal year (FY) 2015

Varying degree of slowdown in agriculture, industry and services

FY2015 forecast at 3.8%, down from 4.6% projected in March 2015 Possibility of 3.0 - 3.5% growth if supply disruptions intensify

4.6

3.5

5.2

3.8

4.5

0

1

2

3

4

5

6

FY2012 FY2013R FY2014P FY2015f FY2016f

Supply-side contributions to growth (% pts)

Agriculture Industry Services GDP growth (basic prices)

2015-06-03 7

Source: https://adb.exposure.co/nepal-earthquake?home-topbox

2015-06-03 8

Agricultural Outlook

Already impacted by delayed and sub-normal monsoon in FY2015

Earthquake led to loss of food stock, livestock, farmland, dwelling

14 priority affected districts account for 13.8% of total area of agricultural holdings

Share of paddy production 9.1%; maize 23.4% and millet 28.7%

0

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15

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30

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Paddy Maize Millet Buckwheat Wheat Barley

Share of priority affected districts in national production, FY2014

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Industrial Outlook

Already affected by lack of adequate electricity supply and supply-side bottlenecks

Priority affected districts account for 20% of total manufacturing establishments, jobs and value added

Slowdown in capital spending in Q42015 will affect construction

Power distribution systems affected

0

1

2

3

4

5

6

7

8

9

10 Share of priority affected districts in total manufacturing value added

0

10

20

30

40

50

60

70

80 Affected hydropower capacity (MW) - as of 8 May

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Source: https://adb.exposure.co/nepal-earthquake?home-topbox

2015-06-03 11

Services Outlook

Drastic slowdown in wholesale and retail trade, and travel and tourism activities

Financial services and educational institutional partially operational

Supply disruptions causing most impact to services sector

Holiday pleasure 51.5%

Trekking & mountaineer

ing 12.8%

Business 3.5%

Piligrimage 9.0%

Official 4.7%

Convention 2.0%

Others 6.8%

Not specified

9.7%

Tourist arrival by purpose of visit in 2013

0

50

100

150

200

250

300

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Registered home stay 2013

No. of affiliated house No. of room No. of bed

2015-06-03 12

Source: ADB Nepal, https://www.facebook.com/adbnrm

2015-06-03 13

Inflation Outlook

Lower agricultural outlook and supply disruptions exerting upward price pressures

Both food and non-food inflation expected to rise Agricultural output (FY2015 hit by monsoon and earthquake; FY2016 chances of

subnormal monsoon)

Supply disruptions to up prices Higher aggregate demand due to cash transfers and reconstruction activities

8.3

9.9

9.1

8.2 8.5

0

2

4

6

8

10

12

FY2012 FY2013 FY2014 FY2015f FY2016f

Contributions to inflation (% pts)

Food and beverage Non-food and services Nepal-CPI

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External Sector Outlook

Exports growth stagnate Import growth to shoot up (agri + industrial)

5.0

3.4

4.7

1.0

-1.5 -2

-1

0

1

2

3

4

5

6

FY2012 FY2013 FY2014 FY2015f FY2016f

Current account balance (% of GDP)

Trade deficit up

Remittances inflows likely up Import growth > Transfers growth

CAB in negative

territory

2015-06-03 15

Migration and Remittances

FY2015 net migration growth may slow down 14 districts account for 18% of total migrant outflows

FY2016 net migration growth to accelerate if rehabilitation and reconstruction activities take off slower than expected

Remittances may go up till the medium term 14 districts account for 13.6% of total remittance inflows)

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Bh

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Daily out-migration and remittances as share of household income in priority affected districts

Out-migration daily average Remittances (% of HH income)

2015-06-03 16

Fiscal Outlook

Capital spending slow down in FY2015 Revenue mobilization < FY2015 target Fiscal deficit will increase Higher internal borrowing to cover R&R cost

In medium-term Revenue growth contingent upon economic activities picking

up pace and tax rate changes

Expenditure will bulge, mostly capital spending Fiscal deficit will go up Higher internal and external borrowing

Fiscal resilience and discipline also important

Public debt level will go up modestly

Implementation capacity needs drastic enhancement

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Limited Implementation Capacity

Higher capital spending on infrastructure, R&R needed

Budget execution and implementation capacities need drastic enhancement

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FY2006 FY2007 FY2008 FY2009 FY2010 FY2012 FY2013R FY2014P

Cap

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Capital expenditure

Capital expenditure (% of allocation) Capital expenditure (% of GDP)

2015-06-03 18

Financing Avenues

Rationalization of ballooning recurrent expenditure could open up some space to increase capital spending, which stands at a mere

3.3% of GDP

Apart of the fund could be raised domestically by selling bills and bonds.

Raising revenue by a special time-bound tax aimed for reconstruction

External grants and loans mostly on concessional terms from multilaterals institutions such as the Asian Development Bank and

from bilateral donors

Full rehabilitation and reconstruction will be a mammoth task.

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Partnership Forum for Nepal, 48th Annual Meeting, ADB (3 May 2015)

Source: https://adb.exposure.co/nepal-earthquake?home-topbox

2015-06-03 20

Immediate Priorities (1)

Delivery of basic relief items and cash grants to affected households before the onset of monsoon

Finalize the Post Disaster Needs Assessment as scheduled and use the results as key inputs for an upcoming international donors'

conference and the fiscal year 2016 budget, which is expected to be

delivered in the second week of July

Appropriate financing arrangements Rationalization of recurrent expenditure Internal borrowing External borrowing Special 1 or 2 yrs R&R tax?

2015-06-03 21

Immediate Priorities (2)

A clear institutional set-up, legal mandate, and implementation arrangement for reconstruction and rehabilitation efforts A separate lean and efficient apolitical entity with a fixed operational lifetime To expedite decision-making, procurement, and approvals Implementation of reconstruction projects should happen through the line

ministries.

Robust monitoring and evaluation of reconstruction and rehabilitation efforts. Good governance is essential for effectiveness of such efforts

Continue the ongoing and planned reforms to increase private sector investment. Important to boost investor confidence Some of the R&R projects may be initiated on a public private partnership (PPP)

basis (PPP Policy, PPP Act)

Other policies and acts prepared or updated with the aim to develop the private sector and increase their investment also need to be passed or enacted in an

expeditious manner

2015-06-03 22

Immediate Priorities (3)

A clear R&R plan & legal backing

A lean and efficient R&R institutional set-up

Enhancing implementation capacity will be key

Scope and pace of R&R activities will influence growth, inflation, external balance, fiscal position,

migration,

2015-06-03 23

Need to Build Back Better

Source: https://adb.exposure.co/nepal-earthquake?home-topbox

2015-06-03 24

THANK YOU!

For more analysis:

Part I: Needs and priorities (http://goo.gl/XL1nHT)

Part II: Economic growth (http://goo.gl/2ngV7A)

Part III: Inflation, current account and fiscal balance (http://goo.gl/dfzkoX)

Asian Development Blog: http://blogs.adb.org/

Pic story: https://adb.exposure.co/nepal-earthquake?home-topbox

ADB Nepal facebook: https://www.facebook.com/adbnrm

ADB Nepal http://www.adb.org/countries/nepal/main