This article was published at myRepublica on September 15, 2020.
Author: Nhasala Joshi is a project lead and Shweta Acharya is a data analyst at Women Entrepreneurship Data (WEData) Nepal project.
Nepal, in the past decade, has nearly halved the percentage of the population living under poverty even though the economic growth of the nation as a whole has been considerably low. During the period, Nepal went through devastating earthquakes in 2015 which terribly affected the country’s economy, but managed to recover in a couple of years. In 2019, the growth rate in GDP of Nepal was 6.7%. With the increase in GDP and per capita income, the living standard of households has significantly improved resulting in increased household spending on better health, education, wellbeing and going beyond daily necessities to creating means for additional income sources such as starting a new business.
This growth can be credited to multiple reasons such as gradually bettering political stability, increasing literacy rates, infrastructural developments, management of electricity, internet accessibility, etc. However, undeniably, remittance played a huge role in improving the GDP and household’s income of people living in various parts of the country. In the previous year, Nepali workers sent 8.1 billion dollars as remittance whose ratio to GDP is 27.3%. At the same time, the existing domestic income sources like service sector, agriculture, industry sector played a vital supporting role for the growth. In 2019, just over 50% of Nepal’s GDP came from its service sector, while agriculture made the second largest 24.26% contribution and 13% came from the industry sector.
COVID-19 and Job loss
COVID-19 has come as a significant obstacle directly affecting this course of economic development of past years. As transmission continues, the government is imposing various phases of lockdown, and the economic progress of the country has almost come to a halt.
One direct link can be seen in the employment landscape of both domestic and foreign sectors, which is the major source of household income. According to UNDP estimates, Three in five employees have lost their jobs in the formal and informal sectors in Nepal. Some formal sector workers with normal hours, regular wages and who pay tax, have been able to save their jobs after experiencing pay cuts and unpaid breaks due to strong labor laws and contracts. But workers in the informal sectors, jobs which are neither taxed nor monitored by the government, don’t have that immunity. 60% of the economically active population of rural Nepal represent workers from seasonal and informal sectors, and the majority have experienced job loss after the COVID-19 outbreak. Informal jobs, even though it’s vulnerable in nature, is productive, easy to establish, diversifies the ways of earning and most importantly improves living standard.
Due to the current COVID-19 crisis, between 1.6 and 2.0 million jobs are likely to be disrupted in Nepal. In domestic scenarios, some sectors will be affected more than others, namely tourism, retail (non-food), automobile and overall activities that are not essentials. Recreational ventures like shopping malls, movie theaters and entertainment will take a long time to recover and workers employed in these sectors are likely to be laid off.
Role of remittance
Remittance has been one of the major sources of income and has a large impact in the socio-economic changes in the country. NRB recognizes that remittance directly impacts the balance of payment (BOP) and gives us, as a country, the ability to sustain import. Workers head out of the country in search of better employment opportunities, aid their family with at least basic day-to-day requirements. Now, as a massive number of foreign workers return home, fluctuation in remittance is expected. What can be already seen is the influx of remittance in the country has decreased by 0.5% compared to previous years.
In the last decade Nepal has seen an increase in the growth of gross national disposable income. Remittance represents a quarter of the nation’s output. Even though it contributes such a large amount, remittance largely is being used for consumption, housing and land and not necessarily invested to further capital that would help in long-term development. But even then, it should not be deemed as all distressing. Even if remittances are totally spent on consumption, there will still be benefits to the receiving economy, to the extent that at least some of the funds are spent on local goods and services. When consumption directs towards spending in education, shelter and health it creates a long-term positive effect and should be seen as an investment in human capital. This further helps in creating investment and output in related fields.
But, because remittance was not directed towards a long-term capital formulation, we can experience its effect during and after the COVID-19 crisis. Decrease in the amount of remittance subsequently decreases the amount of disposable income. It is likely that people go back to consuming less and hereafter compromising on the quality of food, education and the health facility they receive. As remittance directly aided consumption and not capital formulation, households were able to improve their living standard even so, for many households they have the risk of falling back to poverty. Province 1 and 2 had the highest share of labor migration in 2018/19 which was over 24% of migrant workers each, thereafter households from these provinces will likely experience more impact than others. Remittance created an overall positive effect on consumption, investment, saving and income distribution and with the decrease in remittance all these aspects will take a hit.
COVID-19 pandemic does not have a clear end date or when its effects will be minimized is uncertain and given the current global scenario foreign employment depends on the situation of the host countries. With unemployment on the rise, there is going to be a massive number of job-seekers which the current job market cannot manage; a recent survey by IFAD resulted with nearly 77% of the 652 surveyed returnees not willing to re-migrate. In the meantime, Nepal can strategize activities to help people generate income so that no-one has to compromise on the quality of living.
One of the first steps to take right now will be figuring out the ways to sustain informal sector jobs. A clear guidance and support mechanism from the government needs to be developed to help people who are now depended on agriculture, production and daily wage services. Immediate push towards guidance and regulations with focus in hygiene might help keep retail vendors and service providers sustain their businesses. Enforcement of these protocols will help in keeping the income generation activities active. Pathways need to be created for migrants, who have returned with skills and experience, to utilize those in the domestic income sectors. Agricultural analysts and academics suggest shifting focus back into boosting agricultural production, which can address arising food security problems brought by the current crisis. It might take 18 months for the tourism sector in South-Asia to recover, meanwhile, countries in the region can collaborate together to form regional tourism. As of immediately, the government can help the sector with tax relief packages, upgrading tourism infrastructures, and building proper protocols and consumer trust for when tourism restarts.
Another important medium here is to create an encouraging business environment for domestic enterprise. The growth in domestic income sources and employment opportunities can be a key for the way up. Therefore, more investment needs to be poured into establishing new businesses and incentivize people who have savings to decrease consumption and instead tap into opportunities such as investing in entrepreneurship and other capital generating activities. The business ecosystem now needs to have favorable policies and framework to support new and emerging businesses. One definite option is to leverage the technology and current e-commerce landscape, which have been able to save small scale local retails and jobs associated with them. Because of the nature of the crisis, some potential positive impacts could be towards internet service companies, online retail sectors and e-commerce that provide at least some economic growth to counterbalance the damage. The government, with all its means, needs to take this opportunity to offset the damage and aid these sectors. Digital training will help affected groups use the technological infrastructures, and possibly create innovative routes for rural economic activities in the recovery process.