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It is probable that the total cost of the earthquake crisis will be much higher than expected. The direct impact is evaluated roughly around 5 billon dollars. The indirect consequences on the economy will probably be much worse and could reach almost 20% of Nepal’s GDP. The country is entering into a Dark Age. The network of infrastructure systems, which is vital for economic prosperity, is completely destroyed and there is almost no doubt that the Nepal will go into recession this year. After the earthquake, the economy of Nepal is almost as bad as Zimbabwe.
It is probable that the total cost of the earthquake crisis will be much higher than expected. The direct impact is evaluated roughly around 5 billon dollars. The indirect consequences on the economy will probably be much worse and could reach almost 20% of Nepal’s GDP. The country is entering into a Dark Age. The network of infrastructure systems, which is vital for economic prosperity, is completely destroyed and there is almost no doubt that the Nepal will go into recession this year. After the earthquake, the economy of Nepal is almost as bad as Zimbabwe.
The main priority for the economy is to maintain the country’s access to foreign currency. Contrary to what is commonly believed, tourism is only a small part of Nepal’s GDP (around 8.2% in 2013) but it is the second source of foreign currency after worker remittances. In the coming months, the international financial assistance will be of crucial importance to allow the government and the private sector to pay foreign creditors and to stabilize the balance of payments.
The biggest challenge for Nepal won’t be to collect the financial assistance but to use it wisely. Like many underdeveloped countries, corruption is widespread at every level of society. Despite the mechanism of control implemented by the international community, it is likely that at least 10% to 20% of the total amount of the financial assistance will be lost through fraud and embezzlement. It is almost unavoidable.
Rebuilding an economy after a tragic event is not an easy task. However, the following recommendations that worked in other countries may bring good results in Nepal:
- Rethinking monetary policy in order to take into consideration the growing economic relation with China. The Nepali rupee is pegged to the Indian rupee which has hurt strongly the economy of Nepal over the past months in the aftermath of the devaluation of the Indian currency. It would be more pertinent to peg the Nepali rupee to a basket of currency which includes the Chinese yuan;
- Pushing for a Roosevelt infrastructure plan financed and supervised by the international community;
- Developing the hydro energy sector, where China is already a key actor, which implies investing in education to build local expertise and improving the business climate.
It will take at least one decade to recover from the crisis and probably more time for a well-educated middle-class to emerge but the future of Nepal is certainly bright. This country has a lot of potential, especially if it manages to develop an efficient hydro energy sector.
By Christopher Dembik, Economist at Saxo Bank
