Nepals Post-earthquake

Economy: A Preliminary Outlook

Chandan Sapkota
Asian Development Bank
Nepal Resident Mission

Guest lecture at Apex College, Kathmandu, 3 June 2015

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

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

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

2015-06-03

Background
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
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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

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GDP Growth Outlook

6

Supply-side contributions to growth (% pts)

5.2

4.6

4.5
3.8

4
3.5

0
FY2012

FY2013R

Agriculture

FY2014P

Industry

Services

FY2015f

FY2016f

GDP growth (basic prices)

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

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Agricultural Outlook
35

Share of priority affected districts in national production, FY2014

30
25
20
15

10
5

Paddy

Maize

Millet

Buckwheat

Wheat

Production

Area

Production

Area

Production

Area

Production

Area

Production

Area

Production

Area

Barley

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%

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Industrial Outlook
10
9
8
7
6
5
4
3
2
1
0

Share of priority affected districts in total

manufacturing value added

80

Affected hydropower capacity (MW) - as of 8 May

70
60
50
40
30
20
10
0

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

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

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Services Outlook
Tourist arrival by purpose of visit in 2013

300

Registered home stay 2013

250

Others
6.8%

No. of affiliated house

Not
specified
9.7%

No. of room

No. of bed

200

Convention
2.0%
Official
4.7%

150
100

Piligrimage
9.0%

Holiday
pleasure
51.5%

50

Kavrepalanchowk

Makawanpur

Ramechhap

Lalitpur

Nuwakot

Business
3.5%
Trekking &
mountaineer
ing
12.8%

Kathmandu

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

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12

Inflation Outlook
12

Contributions to inflation (% pts)

9.9

10

9.1
8.2

8.3

8.5

8
6
4
2
0
FY2012

FY2013

Food and beverage

FY2014

Non-food and services

FY2015f

FY2016f

Nepal-CPI

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
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13

External Sector Outlook

6

Current account balance (% of GDP)

5.0

4.7

4
3.4

3
2
1.0

1
0
FY2012

FY2013

FY2014

FY2015f

FY2016f

-1
-2

Exports growth stagnate

Import growth to shoot up (agri + industrial)
Remittances inflows likely up
Import growth > Transfers growth

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-1.5

Trade deficit up

CAB in negative
territory

14

Migration and Remittances

Daily out-migration and remittances as share of household income in priority
affected districts
30
25
20
15
10
5

Out-migration daily average

Rasuwa

Bhaktapur

Lalitpur

Okhaldhunga

Dolakha

Ramechhap

Kathmandu

Gorkha

Nuwakot

Sindhuli

Dhading

Sindhupalchowk

Kavrepalanchowk

Makawanpur

Remittances (% of HH income)

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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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

Capital expenditure
90

7
6

70
5
60
50

40

30
2
20

Capital expenditure (% of GDP)

Capital expenditure (% of allocation)

80

10
0

0
FY2006

FY2007

FY2008

FY2009

Capital expenditure (% of allocation)

FY2010

FY2012

FY2013R

FY2014P

Capital expenditure (% of GDP)

Higher capital spending on infrastructure, R&R needed

Budget execution and implementation capacities need drastic
enhancement
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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

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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

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Rationalization of recurrent expenditure

Internal borrowing
External borrowing
Special 1 or 2 yrs R&R tax?

20

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
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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,
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Need to Build Back Better

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

2015-06-03

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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

THANK YOU!
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