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Nepal’s Post-earthquake Economy: A Preliminary Outlook
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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
5
10
15
20
25
30
35
Are
a
Pro
du
ctio
n
Are
a
Pro
du
ctio
n
Are
a
Pro
du
ctio
n
Are
a
Pro
du
ctio
n
Are
a
Pro
du
ctio
n
Are
a
Pro
du
ctio
n
Paddy Maize Millet Buckwheat Wheat Barley
Share of priority affected districts in national production, FY2014
2015-06-03 9
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
2015-06-03 10
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
Kath
man
du
Nu
wakot
La
litpu
r
Ra
mechh
ap
Ma
ka
wan
pur
Kavre
pala
nch
ow
k
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
2015-06-03 14
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)
0
5
10
15
20
25
30
Ma
kaw
an
pur
Ka
vre
pala
nch
ow
k
Sin
dh
upa
lch
ow
k
Dha
din
g
Sin
dh
uli
Nuw
ako
t
Go
rkha
Ka
thm
an
du
Ram
echh
ap
Dola
kha
Okh
ald
hu
nga
Lalit
pu
r
Bh
akta
pu
r
Rasu
wa
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
2015-06-03 17
Limited Implementation Capacity
Higher capital spending on infrastructure, R&R needed
Budget execution and implementation capacities need drastic enhancement
0
1
2
3
4
5
6
7
0
10
20
30
40
50
60
70
80
90
FY2006 FY2007 FY2008 FY2009 FY2010 FY2012 FY2013R FY2014P
Cap
ita
l e
xp
en
ditu
re (
% o
f G
DP
)
Cap
ita
l e
xp
en
ditu
re (
% o
f a
lloca
tio
n)
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.
2015-06-03 19
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