“Nepal needs to focus on eliminating the skills and infrastructure gaps that constrain growth”

The global economy at the moment is in the doldrums due to the impact of the coronavirus pandemic. Businesses across the world have been hit hard by the COVID-19 outbreak as no nation was prepared for a pandemic of this proportion. Lives have been lost. People have lost their jobs. Of late, travel restrictions are being eased by various governments but again each day there is news of some country imposing lockdowns. NepalNews.com.np caught up with Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal and Sri Lanka, to learn more about the global and domestic economy in the present situation. Excerpts:   

What is your projection for the global as well as the Nepali economy in the post-COVID era?

As per our latest Global Economic Prospects report, following a collapse last year caused by the COVID-19 pandemic, global economic output is expected to expand four per cent in 2021 but still remain more than five per cent below pre-pandemic projections. In Nepal, economic growth is estimated to be 0.6 per cent in 2020/21 and is expected to expand to 2.5 per cent in 2021/22 as the country emerges from the impacts of the pandemic. The estimates are based on effective pandemic management, ongoing vaccines deployment, and continued monetary policy support, along with tapering fiscal stimulus.

What are the short-term and long-term goals that Nepal needs to focus on?

The global economy is emerging from the collapse triggered by the COVID-19 pandemic, but the recovery is expected to be subdued. Limiting the spread of the virus, providing relief for vulnerable populations, and deploying vaccines effectively are immediate priorities. Over the longer term, ambitious structural reforms will also be needed to rekindle robust, sustainable and equitable economic growth.

The World Bank is supporting the government’s pandemic response across three stages: relief, restructuring, and a resilient recovery. During the relief stage, the priority is on addressing the immediate health impacts of the pandemic and providing support to livelihoods and firms to reduce vulnerability. During the restructuring stage, the focus will be on strengthening health systems and adjusting to a new normal that prioritises domestic employment generation in a greener and more digital economy. The resilient recovery stage will focus on new opportunities to invest and reforms to promote more sustainable, inclusive and resilient growth in a post-COVID world including emphasis on connectivity and trade for growth and development.

As per your experience, which is one particular area that Nepal needs to focus on for sustainable economic growth?

Nepal needs to focus on eliminating the skills and infrastructure gaps that constrain growth. This requires increased and more efficient investments in human and physical capital. One key area of reforms pertains to strengthening the public investment management process, including for public-private partnerships, and ensuring that there is adequate implementation capacity support to provinces and local governments to deliver critical services to the people.

Easing the skills and infrastructure gaps would greatly help with job creation and would also facilitate export-led growth to support economic transformation and help create a more balanced and sustainable approach to growth that does not rely as heavily on remittances. Needed measures would help reduce input costs for exporters and would also promote greater domestic and foreign investment.

Another critical area would be investments for green growth through measures that help mitigate the impact of climate related shocks which periodically set back Nepal’s growth. Green growth can be promoted through investments in resilient infrastructure and through establishing the institutional frameworks for sustainable use of Nepal’s natural resources.

People in general have been able to improve their living standard due to the remittance money they receive. Yet, many economists are sceptical about this. What do you think are the benefits and perils of a remittance-based economy like Nepal?

Remittances from abroad have been a key driver of poverty reduction over the past two decades through higher wages and household consumption and have enabled households to invest more in health and education. They are estimated to account for one-third of the reduction in absolute poverty between FY96 and FY11. Remittances have also been a source of foreign exchange and government revenue which has resulted in an average savings rate of 52 per cent of GDP in 2019.

Notwithstanding these benefits, Nepal’s heavy reliance on remittances has contributed to a large trade imbalance by disincentivising exports and promoting imports. Specifically, large remittance inflows have caused a real appreciation of the Nepali rupee: In July 2019, it was estimated to be over-appreciated by 21 per cent – more than the equilibrium real effective exchange rate of 126 countries. An overvalued exchange rate makes imports relatively cheaper and exports more expensive, reducing the competitiveness of exporting sectors. This leads to higher imports (at the expense of exports). Nepal takes advantage of higher imports to impose taxes that further disincentivise production for exports and job creation.

The above patterns (i.e. high imports and related taxes, combined with high remittances) makes Nepal particularly vulnerable to external shocks. The current COVID-19 pandemic has made this even more evident.

Is there any specific role that the World Bank will be playing in the near future to help Nepal get back on its feet as the economy has been literally ravaged by the coronavirus pandemic?

The World Bank Group will continue to work closely with the Government on Nepal’s COVID-19 related priorities based on the following four pillars: 

·        Pillar 1: Support to health for saving lives threatened by the virus including procurement and deployment of life-saving vaccines. The Bank responded immediately to the crisis caused by COVID-19 via a US$29 million IDA credit to strengthen national systems for public health preparedness in the country. A proposed additional financing will support the procurement of COVID-19 vaccines. 

·        Pillar 2: Social response for protecting poor and vulnerable people from the impact of the economic and social crisis triggered by the pandemic. The World Bank has provided US$10.85 million to respond to the pandemic’s impact on the school sector. In addition, World Bank investments across several projects are expected to create over 19 million person days of employment. 

·        Pillar 3: Economic response for saving livelihoods, preserving jobs, and ensuring more sustainable business growth and job creation by helping firms and financial institutions build resilience in recovery (rebuilding better). The ongoing World Bank portfolio has been repurposed and restructured making about US$300 million available for COVID-19 relief and recovery efforts. About US$140 million was also released in advances for accelerating achievement of results across the Programme for Results operations. The Government of Nepal and development partners have recently started a joint green recovery initiative to help Nepal get back on track to achieve Middle Income Status and the Sustainable Development Goals by 2030. 

·        Pillar 4: Support for strengthening policies, institutions and investments for resilient and sustainable recovery. Proposed development policy credits will focus on building financial stability, fiscal resilience and economic recovery aimed at sustainable and inclusive growth. 

Are there any economic policies that you would like to see the Nepali government introduce?

It would be important for Nepal to adopt reforms to improve the business and investment environment, particularly for small and medium sized enterprises that show the greatest employment generating potential and support the development of e-commerce platforms. This would help to diversify the economy and create a more balanced pattern of growth that is less reliant on remittances.