After earthquake, trade blockades pose new threat to Nepal's economy
Political unrest since late September in Nepal has culminated in the obstruction of trade and transit, which will have a significant impact on post-quake GDP growth.
Political unrest in Nepal’s Terai region in the run-up to and following the introduction of the new constitution on September 20 has led to the obstruction of trade, something that is having a significant impact on the country’s economy.
The Terai-based parties’ agitation has resulted in serious disruption of imports of major commodities such as petroleum products, including cooking gas, construction and industrial raw materials and other essentials. The resulting acute shortage of petroleum products is the most serious problem.
Although the government has initiated political and diplomatic negotiations, it remains unclear how soon the stalemate will be resolved.
The Terai unrest and the trade and transit obstruction will have a major adverse impact on GDP growth at least in fiscal year (FY) 2016, beyond the impact of the earthquake. GDP grew by 5.2% to $19.8 billion in FY2014, according to ADB. Nepal is the fifth largest economy among the eight South Asian countries, in terms of the size of GDP. Nepal’s trade with and through India accounts for about 90% of its total trade, and overland trade with China has not yet been fully restored since the April earthquake.
In particular, the acute shortage of petroleum products has had a widespread impact on virtually all economic activities, including the construction of key infrastructure facilities: hydropower, roads, airports, and water projects. Post-earthquake reconstruction activities are not yet in full swing. Petroleum products are imported solely from India, and only 10-20% of the country’s requirements are currently being met.
Clearly, growth in FY2016—which ends next July—will be lower than previously forecast, though the extent of the reduction will depend on how long the current situation continues. New growth forecasts can be drawn up based on two possible scenarios:
- An updated baseline scenario, which assumes that the Terai unrest and trade and transit obstruction will be resolved by mid-January 2016 (the first half of FY2016) and that economic activities and the affected sectors will gradually recover during the second half of the fiscal year, along with the initiation and pick-up of post-earthquake reconstruction activities.
- A less optimistic scenario that assumes the stalemate continues into the second half of the fiscal year.
Under the baseline scenario, growth in FY2016 will likely decelerate to about 1.8%, compared to the earlier baseline projection of 4.5%. Under the less optimistic scenario, growth could turn negative to about -0.7%.
- Growth in the agriculture sector, which accounts for a third of GDP, will decelerate to about 0.5% under the updated baseline scenario due to inadequate monsoon rainfall, a shortage of chemical fertilizers and the impact of fuel shortages on the harvesting of paddy and maize, causing an estimated 5-10% reduction in the output of the crops, respectively from last year’s levels. If the current stalemate persists beyond the winter season, the winter crop (mainly wheat) could also be significantly affected, resulting in a contraction of about 0.7% for the sector in FY2016.
- Growth in the industry sector (about 15% of GDP) will decelerate to about 1.3% from the earlier projection of 7.3% because of the closure and reduced output of manufacturing industries in Terai and other parts of the country. The impact on the overall sector will, however, be more severe, with a 2.2% contraction likely if the stalemate continues into the second half of the year.
- Growth in the services sector, representing 52% percent of GDP, will likely decline to about 2.8% under the updated baseline scenario, from the earlier projection of 5.3%. All key subsectors—including wholesale and retail trade; transport; hotel and restaurant businesses; and financial intermediation—have been adversely affected by the fuel shortage. The services sector could experience virtually zero growth in FY2016 if the crisis continues into the second half of the year. Subsectors such as education and health could be significantly affected under this less optimistic scenario, in view of the continued closure of schools and emerging shortage of medical supplies.
To reduce the impact of the crisis, it is critical to initiate and accelerate the post-earthquake reconstruction programs by establishing a national reconstruction authority and instituting other necessary budget execution and implementation arrangements. Although somewhat late, the National Planning Commission’s recent initiative to kick-start reconstruction activities should help in this regard. It would also be important to accelerate economic reforms announced as part of the government's FY2015 budget, particularly those aimed at promoting private sector investment and scaling up public capital spending.