KFA Writes

Economic Impact of Covid-19 – In context of Global and Nepalese Economies

2020-04-12

Free Fall in Global GDP & Rise in Global Unemployment:

While there is no way to tell exactly what the economic damage from the global COVID-19 novel coronavirus pandemic will be, there is widespread agreement among economists that it will have severe negative impacts on the global economy. Early estimates predicated that, should the virus become a global pandemic, most major economies will lose at least 2.4 percent of the value their gross domestic product (GDP) over 2020, leading economists to already reduce their 2020 forecasts of global economic growth down from around 3.0 percent to 2.4 percent. To put this number in perspective, global GDP was estimated at around 86.6 trillion U.S. dollars in 2019 – meaning that just a 0.4 percent drop in economic growth amounts to almost 3.5 trillion U.S. dollars in lost economic output. However, these predictions were made prior to COVID-19 becoming a global pandemic, and before the implementation of widespread restrictions on social contact to stop the spread of the virus. Since then, global stock markets have suffered dramatic falls due to the outbreak, and the Dow Jones reported its largest-ever single day fall of almost 3,000 points on March 16, 2020 – beating its previous record of 2,300 points that was set only four days earlier.

The economic damage caused by the COVID-19 pandemic is largely driven by a fall in demand, meaning that there are not consumers to purchase the goods and services available in the global economy. This dynamic can be clearly seen in heavily affected industries such as travel and tourism. To slow the spread of the virus, countries placed restrictions on travel, meaning that many people cannot purchase flights for holidays or business trips. This reduction in consumer demand causes airlines to lose planned revenue, meaning they then need to cut their expenses by reducing the number of flights they operate. Without government assistance, eventually airlines will also need to reduce lay off staff to further cut costs. The same dynamic applies to other industries, for example with falling demand for oil and new cars as daily commutes, social events and holidays are no longer possible. As companies start cutting staff to make up for lost revenue, the worry is that this will create a downward economic spiral when these newly unemployed workers can no longer afford to purchase unaffected goods and services. To use retail as an example, an increase in unemployment will compound the reduction in sales that occurred from the closure of shop-fronts, cascading the crisis over wider retail segment. It is this dynamic that has economists contemplating whether the COVID-19 pandemic could lead to a global recession on the scale of the Great Depression of 1930s.

Global Unemployment:

Speaking in Geneva via videoconference on 7th April, 2020, ILO Director-General Guy Ryder noted that at the start of the year – before COVID-19 spread worldwide - global unemployment already stood at around 190 million.

With the additional shock of the virus, it was “obvious” that the world of work is suffering an “absolutely extraordinary fall” because of the effects of the pandemic and the measures taken to deal with it, he added.

Worst-affected sectors

Workers in four sectors that have experienced the most “drastic” effects of the disease and falling production are: food and accommodation (144 million workers), retail and wholesale (482 million); business services and administration (157 million); and manufacturing (463 million).

Together, they add up to 37.5 per cent of global employment and this is where the “sharp end” of the impact of the pandemic is being felt now, the ILO chief added.

Light at End of the Tunnel:

Despite the clear danger that the global economy is in, there are also reasons to be hopeful that this worst-case scenario can be avoided. Governments have learned from previous crises that the effects of a demand-driven recession can be countered with government spending. Consequently, many governments are increasing their provision of monetary welfare to citizens, and ensuring businesses have access to the funds needed to keep their staff employed throughout the pandemic. In addition, the specific nature of this crisis means that some sectors may benefit, such as e-commerce, food retail, and the healthcare industry - providing at least some economic growth to offset the damage. Finally, there is the fact that the crisis may have a clear end date when all restrictions on movement can be lifted (for example, when a vaccine is developed). Taken together, this means it is at least possible the global economy could experience a sharp rebound once the pandemic is over. There are still many variables that could affect such an economic recovery – for example, a reduced supply of goods and services to meet lower demand could create mid-term shortages and price increases – but there are some reasons to think that, with the right mix of appropriate government responses and luck, some of the more catastrophic predictions may not come to pass.

Impact on Nepalese Economy:

Tourism and Remittance are and going to be the two-most affected areas as a result of this Pandemic.  While our National Competitiveness lies in the overall hospitality sectors such as Hotels, Airlines, Restaurants, Trekking and other Adventure sports/activities, Remittance, which takes a brunt of covering almost 30% of our GDP, in an otherwise heavily-lopsided trade-deficit situation (with Import/Export Ratio of more than 13 Times), has been our life saver for several years.

There will be substantial bloodshed from the above two sectors, which will be very  challenging to overcome.  Job losses, mass reverse-migration will directly impact living standard, nutrition, health care, among other important variables.

Government’s Approach – Highly Dismal.

I must admit, there has been nothing so far. Nepal Government’s attitude towards Entrepreneurs or Business Persons has been very disappointing and negative. While the entire world have announced relief packages for affected sectors, there is nothing so far from the Nepal Government, which is very unfortunate. Sometimes fail to understand, our Finance Minister, considered as such an educated person, having served institutions like IMF, Central Bank and Planning Commission in the highest capacities, has such a poor decision-making and resolve as far as stimulating the economy is considered. Having a dedicated Public-Private-Partnership (PPP) Cell in National Planning Commission is not enough when Government’s attitude towards Private Sector is so negative. Our sincere request to the Government is to please listen and feel the role of Private Sector and do something concrete immediately. There is no point waiting. There is nothing to wait for. We are always there to collaborate and add value.  Among others, some of the immediate measures Government can take are as follows:

1. Reduction of Interest Rates (at least 50%) for borrowed funds. NRB can subsidize this.

2. Defer VAT and TDS Payments for at least upto Ashad 2077.

3. Interest-Free Loans/Grants to targeted Sectors such as Hotels, Restaurants, Travel Agencies, Airlines, Transport, Entertainment Businesses.

4. Provide Grants to support upto 80% of Salary Expenses for at least 3 months

5. Reduce/Waive Corporate Tax Rates for FY 76/77

6. Reduce/Waive Personal Income Tax for remaining months for FY 76/77.

 

Way forward

Entrepreneurs have to pull up their socks now. It is now or never. Will be covering structured “Roles of Nepali Entrepreneurs in this Period” in my next article.

-Resta Jha

The Author is Chairman of KFA, leading Institute providing Training, Education and Consulting Services to various sectors in Nepal.

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