Dr. Prakash Kumar Shrestha

Economic prosperity requires increase in per capita income, among others. Rise in per capita income is possible only through higher economic growth. Hence, economic growth is taken as an important economic indicator. Economic growth implies a rate of increase in output of final goods and services in the economy within a certain period of time, normally within a fiscal year. Accelerating output growth generates employment for and income of people.
Nepal needs a higher economic growth to be a prosperous country. Elevated level of growth for two to three decades is needed to transform economy by reducing poverty, as the experience of South East Asian countries and China showed. Economic growth in Nepal, however, remained sluggish if we look back in the past. For the period of 1975/76 to 2015/16, average economic growth was 4.2 per cent. During that period, some fiscal years recorded high economic growth such as 10 per cent in 1980/81, 8.8 per cent in 1983/84, 6.4 per cent in 1990/91, 8.2 per cent in 1993/95, 6.1 per cent in 1999/00, 6.1 per cent in 2007/08 and 6.0 per cent in 2013/14. However, there was no continuous higher growth for more than a year.

Higher growth
Nepal has for the first time achieved a higher economic growth continuously for three years during 2016/17 to 2018/19. The economy witnessed a meager growth of just 0.59 per cent in 2015/16 as a result of severe impact of the earthquake and economic blockade. However, new constitution was promulgated in September 2015 as formulated by the second Constituent Assembly (CA), after which, Nepal entered the era of federal republic system. The new constitution, being more inclusive through devolving power, resources and responsibilities to subnational governments, has increased the expectation and optimism. People dreamt of the country embarking on the journey of prosperity. Consequently, economic activities started expanding, without any strikes, pushing up economic growth to 8.2 per cent in 2016/17.
In 2017, elections for three tiers of government as per the new constitution were held. After two decades of vacuum, local bodies found elected representatives. As a new federal structure, seven provincial governments were also established. By projecting K.P. Sharma Oli as next Prime Minister, the then Nepal Communist Party (UML) and Nepal Communist Party -Maoist Centre agreed on running election jointly and unifying two parties after the election. So, people provided almost two-thirds majority to these two parties combined together.
Central government was formed under the premiership of K.P. Sharma Oli, as the first elected government of federal republic in the beginning of 2018. The new government adopted the national vision of making Prosperous Nepal, Happy Nepali and formulated required laws and gave due focus on developing physical infrastructure and improving business environment. Implementation of fiscal federalism also began by handing over resources to subnational governments. Doing business index constructed by the World Bank started improving, hence, the value of which was 58 in 2017, but increased to 63.2 in 2020, hiking Nepal’s rank from 110th to 94th. This period also witnessed elimination of power load shedding by improving internal distribution management and importing electricity from India.

COVID-19 hits hard
As a result of new federal political environment with stability and improvement in business environment, Nepali economy grew by 6.7 per cent and 7.0 per cent in 2017/18 and 2018/19 respectively. The government set the growth target of 8.5 per cent for 2019/20 in the budget. While it was in the middle of the implementation, new coronavirus first seen in December 2019 in Wuhan, China, started spreading across the globe. The first COVID-19 case was traced in February 2020 in Nepal, which later spread across the country.
Nepal closed the border and banned domestic and international flights and subsequently imposed lockdown throughout the country on March 24, 2020 to prevent the spread of the contagious virus. Because of this, except a few essential activities, all other activities came to a halt, which continued for almost three months. Though the government is relatively successful in containing the pandemic, the economy has been badly hit, resulting in reversal of economic growth in 2019/20. The Central Bureau of Statistics, in May 2020, projected the economic growth of 2.3 per cent for 2019/20. However, many international institutions have projected near zero economic growth for that fiscal year. In this way, Nepal’s higher growth trajectory got serious setback due to the pandemic.
Because of the pandemic, both health and economic crises had to be tackled at the same time. When there was no any medicine and vaccine for COVID-19, testing, tracing and the use of various treatment methods were adopted. Lockdown measures severely affected daily wage workers and small businesses. For daily survival of vulnerable people and workers working in informal sector, local bodies were directed to provide food relief to them.
The government extended the time deadline of paying tax and other dues during the lockdown period. Nepal Rastra Bank (NRB) directed banks and financial institutions (BFIs) to provide 10 per cent rebate on interest payment within mid-April 2020 and to lower the interest rate charged by 2 percentage points for last quarter of the fiscal year. Monetary policy for 2020/21 has classified the businesses impacted by COVID-19 into three categories: severe, mild and low and availed refinance facilities of more than Rs. 2 billion at 3 to 5 per cent interest rates to borrowers. By introducing new procedures for refinancing, 70 per cent of refinance fund is made available to small borrowers borrowing less than Rs. 50 million.
Monetary policy also introduced the provision of restructuring and rescheduling of loans, classification of loans as it was in the beginning of the lockdown, reduction of fees charged by BFIs, and providing additional working capital loans. In addition, in order to inject liquidity in the market and lower interest rate, monetary policy reduced cash reserve ratio to 3 per cent, bank rate to 5 per cent and repo rate to 3 per cent.
The government also introduced various measures for relief and recovery in the budget for 2020/21, with the main objectives of saving people’s life from the pandemic and making quick economic recovery. Along with special focus on containing COVID-19 and building health infrastructure, the budget continued the relief programmes until normalisation of economic activities.
The budget directed the NRB to increase the refinance facility through monetary policy and incorporated some relief and recovery measures such as exemption in lockdown period demand charge of electricity for manufacturing industries, free electricity for poor households and discount for consuming electricity up to 250 units, establishment of business continuity fund of Rs. 50 billion, 50 per cent grant on insurance for COVID-19, government depositing social security contribution, which needs to be deposited by the organised sector for the lockdown period and providing facility of borrowing from it. Other concessions include waiver given to parking charges to be paid by the Nepali airline companies, renewal fees for Air Operator’s Certification, charges for Air Worthiness Certification and infrastructure tax levied on aviation fuel.
Rebate of 25 to 75 per cent on income tax has been given to micro, cottage and small enterprises on the income of 2019/20. Similarly, 20 per cent rebate has been provided to air service, transport service, hotel, travel and trekking businesses. The budget also provided VAT exemption on raw materials imported by pharmaceutical industries and excise duty exemption on domestic production of ethanol to be used as raw materials for sanitiser and on personal protective equipment.
Budget of Rs. 11.6 billion has been allocated for Prime Minister Employment Programme to provide employment to those people who lost jobs because of CIVID-19. That amount is sufficient to provide employment of 100 days to 200 thousand unemployed persons. The government has also set aside budget of about Rs. 14 billion to provide interest subsidy to bank loans flowed to specific areas. This amount is expected to be enough for providing concessional lending of up to Rs. 200 billion. More importantly, now onward, commercial banks have to provide concessional lending of at least 10 from each branch and national level development banks have to provide such a lending of at least 5 from each branch. Altogether, financial resource available for economic recovery amounts to Rs. 500 billion even excluding rebate and exemption on tax and fees. This amount is about 13 per cent of estimated GDP of last fiscal year.
Because of various provisions for relief and recovery as well as opening up economy gradually from September 2020, economic activities started resuming and improving. Collection of revenue in recent days proves this. Likewise, the online survey of enterprises by NRB showed that businesses in full operation increased from 4 per cent in July 2020 to 54 per cent in December 2020. Only 9 per cent, compared to 61 per cent earlier, were closed in December 2020. Subsequent opening up of all economic activities thereafter must have improved the situation.

Economic recovery
Because of restriction of mobility and gathering of people, e-commerce, digital payments and the use of information technology have increased during the lockdown period, opening up new avenue for businesses. However, tourism related activities, basically dependent on foreign tourists and public transportation seem to need some more time for recovery.
The government has been successful in bringing vaccine for COVID-19 and vaccination process has started on a priority basis. Bringing of additional vaccine is also in pipeline. These attempts have reduced the risks of COVID-19 which is helpful for expediting economic recovery. Increasing capital expenditure by the government will pave the way for higher economic growth. Provincial and local governments also need to focus to revive the economy by providing assistance to the residents and enterprises in trouble.
Amidst COVID-19 pandemic, feud and split in ruling party have made people shocked against the expectation of stability for full term. However, it can be expected that economic and social transformation may not be affected much, given the current federal system with right and resources available to subnational governments. Announced election for the House of Representatives will be helpful for boosting domestic demand in the economy, highly needed for economic recovery. In the post-COVID period, all stakeholders, need to focus on achieving higher economic growth which is beneficial for all.

(Dr. Shrestha is Economic Advisor at the Ministry of Finance.)