[Interview] Nepal quakes 'severely disrupted all economic activities'

This blog post is adapted from an interview published in Deutsche Welle (DW) on 26 May 2015. An earlier updated economic outlook following Nepal’s earthquake is here.

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More than 8,600 people died in two major quakes that hit Nepal on April 25 and May 12, destroying nearly half a million houses and leaving thousands desperate for food, shelter and water. Thousands more have been left homeless and are camping out in the open, with just weeks to go until the monsoon rains. The UN estimates eight million people - nearly a third of Nepal's population - may have been affected by the earthquake, with at least two million people needing tents, water, food and medicines over the next months.

In a DW interview, Chandan Sapkota, economics officer at the Nepal office of the Asian Development Bank (ADB), talks about the extent of the economic damage caused by the disaster, what it will take to rebuild the Himalayan nation's shattered economy and where the money for reconstruction is likely to come from.

DW: In monetary terms, how would you assess the scale of the damage caused by the quakes?

Chandan Sapkota: The 7.8 magnitude earthquake on April 25 and the subsequent aftershocks - including a 6.7 magnitude tremor on April 26 and a 7.3 magnitude quake on May 12 - have caused widespread damage to lives, property and livelihoods. Over 8,600 people are dead, and the number of injured is nearing 22,000.

Furthermore, over half a million houses have been destroyed. Many businesses are fully or partially closed and tourists are staying away. A clearer picture on the full cost of the earthquake will emerge following the post disaster needs assessment, which is scheduled to be completed by mid-June, but the government has suggested it could be $5-$10 billion. Certainly, monetary and other costs to Nepal are huge.

Which parts of the country are most affected?

Almost half of the 75 districts in Nepal have been affected one way or another. However, the damage is most pronounced in the upper belt of central and western administrative regions - Kathmandu valley falls within the central region. The government has identified 14 districts as severely earthquake-hit areas for rescue and relief operations. These districts account for 15.5 percent of the total land area of Nepal.

Rural roads, schools, community centers, health posts, bridges, homes, farmland, livestock, food stock and heritage sites have been particularly badly damaged. Some key utilities like power distribution systems, water supply and sanitation facilities have also been affected.

How has this disaster impacted the country's economy?

The disaster has severely disrupted all economic activities - agricultural, industrial and services - in the earthquake-hit areas in varying degrees. Farmland, livestock and food stocks have suffered from landslides which is problematic so close to the planting season.

Power and water distribution, manufacturing and construction activities have also been disrupted. Meanwhile, retail and wholesale activities, the largest sub-sector save agriculture, and tourism have been hit hard. Schools, universities and financial services are only partially operational. Confidence in the real estate and housing markets has plummeted.

Supply disruptions have exerted upward pressure on food and non-food inflation. Exports have declined and imports have increased, widening the trade deficit and reducing the current account surplus. Slower economic activities means the government is pulling in less tax revenue than it anticipated, which will undermine its budget spending.

The earthquake has hit the poorest and marginalized populations in the remote areas most severely. There is a risk that the loss of livelihoods, coupled with higher food prices, will push a sizable number of people back below the poverty line, calling for urgent attention of providing livelihood restoration support in a timely manner.

With a well-designed recovery and reconstruction plan together with efficient relief operations, it is likely that the economy will rebound, including tourism activities, soon. Basic services are being gradually restored.

According to your estimate, how much money is needed to reconstruct the country, and what could be achieved with that amount?

It would be hard to put a number on reconstruction costs right now as a detailed assessment only started earlier in the middle of last week. At the least, it will be over $2 billion for rehabilitation and reconstruction of physical infrastructure and heritage sites. If we include the cost of retrofitting the buildings and facilities that survived the earthquakes, the total cost could be substantially more. The government has set up a $2 billion National Reconstruction Fund, to which it has contributed $200 million and is aiming to raise the remaining from donors.

What facilities need to be reconstructed first, and does the country have the necessary means to do this at the moment?

Full rehabilitation and reconstruction will be a mammoth task for the country. A massive and speedy effort is crucial before the onset of the monsoon expected around second week of June. This means temporary shelters, cash transfers, food supplies, sanitation and the resumption of basic public services, among others. Then, the difficult task of rehabilitation and reconstruction of roads, bridges, schools, health posts, water supplies, power distribution systems and world famous heritage sites should get going.

To do all this, the country will require a clear institutional set-up, legal mandate, and clear implementation arrangements. A separate lean, efficient apolitical body with a fixed operational lifetime may be helpful to expedite decision-making, procurement, and approvals although reconstruction projects be implemented through the line ministries that are best informed about their areas. This should be complemented by robust monitoring and evaluation mechanisms. In short, overall project implementation capacity needs to be drastically enhanced.

Where is Nepal expected to get the necessary funds from for reconstructing the country?

The country will need large amounts of funds for reconstruction. There are several avenues to bridge the gap. First, rationalization of ballooning recurrent expenditure could open up some space to increase capital spending, which stands at a mere 3.3 percent of GDP.

Second, a part of the fund could be raised domestically by selling bills and bonds. Bond sales could be larger than the government has typically done but the yield has to be attractive enough for the public, financial institutions and pension funds to buy. Likewise, the government may also consider raising revenue by a special time-bound tax targeted for reconstruction.

Third, external grants and loans - mostly on concessional terms from multilaterals institutions such as the Asian Development Bank and from bilateral donors - could cover the remaining funding need. Overall, we are hopeful about the country's fiscal resilience and discipline to be able to handle the reconstruction needs. Mobilizing funds is vital but the government needs to match this with a viable reconstruction plan and a clear strategy for implementation.

How is this likely to affect the country's economic outlook in the near and mid-term?

The earthquake and subsequent aftershocks will certainly impact economic growth, inflation, the external trade balance and the country's fiscal position. It will likely drag GDP growth down to 3.8 percent in the fiscal year (FY) 2015 ending July 15, 2015 - 0.8 percentage points lower than the 4.6 percent rate forecast in ADB's Asian Development Outlook 2015 (ADO 2015) published in March. Growth could be even lower - between three percent and 3.5 percent - if supply disruptions become more intense than we currently expect. GDP grew by 5.2 percent (at basic prices) in FY2014.

In FY2016, growth could rebound to 4.5 percent or higher contingent upon the scale and pace of rehabilitation and reconstruction efforts concerning physical infrastructure. The medium-term growth outlook depends on monsoon rains, a resurgence of investor confidence, and reconstruction efforts.

Lower agricultural output and supply disruptions will exert upward pressures on food and non-food prices, resulting in inflation to edge up to 8.2 percent in FY2015 and 8.5 percent in FY2016 In the medium term, the boost in aggregate demand as a result of higher reconstruction spending will likely keep inflation at elevated levels.

The fiscal deficit and current account balance will likely worsen in the medium-term. The country's ability to cope with possible shortages of construction materials and labor for reconstruction will also impact the outlook for growth, inflation and the external balance.

How is this likely to impact migration?

There could well be a net increase in outmigration, particularly if reconstruction is slow, which could create a shortage of labor, a further slowdown in reconstruction, and push up wages. Continuing the reforms to increase private sector investment, including through public private partnerships, in construction and labor-intensive manufacturing will be critical to create adequate jobs and restrain the outflow of workers in the short to medium term.

Updated economic outlook following Nepal’s earthquake

This blog post is adapted from a 3 post-disaster blog posts on Asian Development Blog. Here are parts 1, 2 and 3.

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In a blog post on 1 May, we presented a quick preliminary analysis of the economic impact of the 7.8 magnitude earthquake that struck Nepal on 25 April.

A subsequent 7.3 magnitude aftershock on 12 May brought further casualties and inflicted added damage to property. The government has declared 14 districts as severely affected (mostly in the central and western regions) although the earthquakes have affected about two-thirds of Nepal’s 75 districts.

Background. According to the National Seismological Center, the 25 April earthquake was followed by over 240 aftershocks with local magnitude above 4. The powerful aftershock of 12 May shook a large part of the country, particularly central and western administrative regions, further damaging the already weakened houses and other physical infrastructure, and triggering massive landslides in rural areas.

Latest data have confirmed over 8,500 deaths and 17,866 injured. Some 489,549 and 269,534 houses were, respectively, fully and partially destroyed, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. Meanwhile, thousands of classrooms have been either fully or partially damaged.

Needs assessment. The economic cost of damage following the earthquake and aftershocks, and the rehabilitation and reconstruction needs will be clearer after a detailed Post Disaster Needs Assessment, initiated by the government in collaboration with development partners, including ADB. The assessment, which has just kicked off, is scheduled to be completed by 15 June. ADB will be leading/co-leading the assessment of the education, irrigation and transport sectors, and macroeconomic impact assessment.

Growth outlook: The agriculture, industry, and services sectors will see a varying degree of slowdown as a result of the earthquake and powerful aftershocks, which will likely drag GDP growth down to 3.8% in the fiscal year (FY) 2015 ending 15 July 2015, 0.8 percentage points lower than the 4.6% rate forecast in ADB’s Asian Development Outlook 2015 (ADO 2015) published in March. There is a prospect for even lower growth (between 3% and 3.5%) if supply disruptions become more intense than we currently expect. GDP grew by 5.2% (at basic prices) in FY2014.

In FY2016, the loss of seeds, farmland, and livestock, and a weak forecast monsoon will mean agricultural output will remain weak but the industry and services sectors are expected to rebound — depending on the speed of rehabilitation and reconstruction activities, and their impact on aggregate demand. This could result in GDP growth of about 4.5% next year. Within the services sector, the real estate and renting sub-sector is expected to further slow but a modest pick-up in hotel and restaurant activities is likely due to a partial recovery of tourism sector. The possibility of higher growth rate (between 4.5% and 5.5%) exists, but it will be contingent upon the scale and pace of rehabilitation and reconstruction efforts.

Source: Central Bureau of Statistics; ADB Nepal Resident Mission staff estimates. 

• Agriculture. Beyond the impact of last year’s delayed and sub-normal monsoon, the impact of the earthquake on the agricultural production (which accounts for about 34% of GDP) will be minimal this fiscal year given that harvesting was already largely completed.
• However, there has been substantial loss of food stocks and livestock and aftershocks have swept away farmland in some of the severely affected districts. The 14 most affected districts account for 13.8% of the total area of agricultural holdings. The share of paddy (rice) produced in these districts is about 9.1% of national production while the area under paddy production accounts for 8.6% of the country’s total paddy area.
• Production of maize and millet will be somewhat more affected given that these 14 districts together account for a relatively large 23.4% and 28.7% of national production, respectively.
• Given this, we are less upbeat on the outlook for the agricultural sector than we were on 1 May and now see agricultural output growth this year at 2.5% versus the 3.0% growth we forecast in May and in March. The loss of farmland and livestock in the severely affected areas, and the recent forecast of a potentially weak monsoon (influenced by the building up of El Nino conditions over the Pacific) will likely keep agricultural sector growth stagnant in FY2016.

Source: Ministry of Agricultural Development

• Industry. Growth in the industrial sector (which accounts for about 15% of GDP) has been held back by the lack of adequate electricity and other supply-side bottlenecks for a long time. The earthquake will further slow industrial activities in the remaining months of FY2015.
• The severely affected districts account for about 20% of total manufacturing establishments, manufacturing jobs, and manufacturing value-added in the country. Similarly, nearly a quarter of total hydropower produced in the country is affected by the earthquake. The drastic slowdown in capital spending and building activities following the earthquakes will hit construction. The cumulative impact of these sub-sectoral developments mean that we now see industrial growth at 2.3%, lower than the 3.5% level forecast in March.
• In FY2016, the planned reconstruction spending and prospects of hydropower plants resuming normal operation will likely boost industrial sector growth.

Source: Central Bureau of Statistics

• Services. The services sector (which accounts for about 51% of GDP) will be the most affected by the earthquake. There has been a drastic slowdown in wholesale and retail trade in the severely affected districts as warehouses, shops, and trading outlets are only partially operational. Tourism has slowed sharply due to the earthquake, landslides and avalanches, resulting in cancellation of bookings and changed travel plans. Furthermore, the partial opening of banks and financial institutions in the affected districts will slow credit flows and other transactions.
• The combined effect of these will lower services sector growth from the 5.8% forecast in March to around 5.1%. In FY2016, the rebound of wholesale and retail trade, tourism (to some extent), and the normalization of financial activities will likely mean services sector growth will shoot up. This is despite a potential lull in the real estate and renting services sub-sector.

Inflation. Lower agricultural output in the first nine months of fiscal year (FY) 2015 (ending 15 July 2015) was already exerting upward pressure on food prices. This is being compounded by the depletion of household food stocks and farmland in the severely affected areas as well as supply disruptions along the major trading routes with the People’s Republic of China. With the onset of the monsoon, further supply disruptions are likely due to landslides.

These two factors will likely increase prices of cereal, vegetables, and fruits, pushing up food inflation to double-digit levels despite lower prices of fuel exerting less pressure on farm machinery, irrigation, and food processing costs. Similarly, non-food inflation, mainly from imported items, will be boosted by the supply disruptions, which intensified after the strong aftershocks. The combined impact of these two factors will push up headline inflation in FY2015 to 8.2% from the 7.7% level forecast in ADB’s March Asian Development Outlook 2015 (ADO 2015). Inflation in FY2014 was 9.1%.

In FY2016, the projected slowdown in agricultural output due to a likely sub-normal monsoon, higher aggregate demand due to cash transfers to cover basic housing requirement, government, temporary jobs during rehabilitation and reconstruction, and production bottlenecks (arising from the long running supply-side constraints such as the lack of adequate electricity, labor shortages and low productivity, etc) will likely push headline inflation to around 8.5%.

Source: Nepal Rastra Bank; ADB Nepal Resident Mission staff estimates

External sector balance. The ADO 2015 forecast Nepal’s current account balance at 2.7% of GDP for FY2015, primarily due to the slowdown in official remittance inflows. In fact, official remittance inflows in the first nine months of FY2015 decelerated much more than our earlier estimate. Hence, despite the uptick in inflows immediately after the earthquake, the rate of annual inflows in FY2015 will still be lower than in FY2014.

Meanwhile, the trade deficit is expected to widen further as exports slow and imports register modest growth, primarily due to higher non-oil imports (and despite lower oil imports which constitute about 20% of total merchandise imports). The impact of the earthquake on the agricultural and manufacturing sectors will also hit merchandise exports in the remaining months of FY2015.

Furthermore, tourism earnings will also be negatively affected as mountaineering and trekking activities have been closed for the rest of this season. Popular trekking routes, world famous heritage sites, and many hotels have either been destroyed, require major repair, or need careful structural assessment.

The combined effects of these will likely bring down Nepal’s current account surplus to about 1.0% of GDP this fiscal year, down from 4.7% of GDP in FY2014.

In FY2016, despite an expected moderate rebound in remittance inflows, substantially higher imports will likely push the current account to a deficit of 1.5% of GDP. Exports will likely rise marginally primarily due to a rise in manufacturing output next year but imports will likely increase drastically as a lower agricultural harvest will likely mean higher food imports to meet demand. Rehabilitation and reconstruction efforts will also necessitate importing items ranging from industrial inputs to heavy machinery and construction materials. This will further widen the trade deficit.

Meanwhile, the picture on migration (and subsequently workers’ remittances) is unclear as of now, but a highly probable scenario is that there will be a net increase in the number of emigrant workers if reconstruction projects are slow to get off the ground, resulting in a lack of job opportunities. The severely affected 14 districts account for about 18% of total migrant outflows and 13.6% of total remittance inflows. Overall, current account balance, and the balance of payments, will largely depend on the imports and remittances inflows.

Source: Department of Foreign Employment; World Bank; ADB NRM staff estimates.

Fiscal balance. About 60% of total capital spending typically happens in the last three months of the fiscal year. The earthquake and subsequent aftershocks have delayed planned project implementation and forced the government to realign its focus toward immediate relief and rehabilitation efforts before the onset of the monsoon. Any perceived excess funds that are unlikely to be spent this year have already been diverted for this purpose. The 14 severely affected districts together account for about 58% of total capital spending in the country. Hence, overall capital spending will fall below the government’s NRs117 billion target set for FY2015. In fact, actual capital spending has averaged just 76% of budgeted allocations in the past three years. Recurrent spending will likely be over 95% of budgeted allocation (about 65% of allocation).

Meanwhile, the disruption to regular economic activities has slowed demand for both domestic and imported goods, which have undermined overall revenue mobilization. Import-based revenue accounts (custom duties, value added tax and excise on imports only) for about 45% of total revenue.

Source: Ministry of Finance

Consequently, the government is projecting a revenue shortfall of about $300 million (against a FY2015 revenue target of $4.4 billion, which includes grants as well). To cover a part of the immediate relief, rehabilitation and reconstruction costs, the government is raising about $500 million from bill and bond sales in the next two months. Hence, a marginal slowdown in expenditure, a bigger-than-expected revenue shortfall, and a comparatively large volume of domestic borrowing in the coming two months will likely increase the fiscal deficit to about 1% of GDP this year, up from 0.1% of GDP in FY2014.

In FY2016, revenue will likely rebound modestly with an increase in consumption of imported and domestic items. Meanwhile, capital spending will increase to cover rehabilitation and reconstruction costs. The government has estimated the preliminary cost for reconstruction at $5 billion to $10 billion spread over a few years. Consequently, the fiscal deficit will likely be higher than 2% of GDP in the next few years. Its exact level will be contingent upon the contribution from development partners (mainly grants). Meanwhile, the government has set up a National Reconstruction Fund of $2 billion to which it has contributed $200 million. It hopes to raise the rest from donors during the international donors’ conference expected to be held in coming months.

Priorities. The government is winding down rescue operations and is gradually focusing on relief efforts in view of the start of the monsoon season in the second week of June. Together with relief efforts, rehabilitation and reconstruction planning, institutional arrangement and implementation will gather pace. In this regard, the following priorities may be considered:

1. Delivery of basic relief items and cash grants to affected households before the onset of monsoon.
2. Finalize the Post Disaster Needs Assessment as scheduled and use the results as key inputs for an upcoming international donors' conference and the fiscal year 2016 budget, which is expected to be delivered in the second week of July.
   To finance reconstruction and rehabilitation costs, rationalization of recurrent expenditure could open up some space to increase capital expenditure. Domestic borrowing could focus on medium-to-long-term bonds. External borrowing is normally on concessional terms.
3. Ensure a clear institutional set-up, legal mandate, and implementation arrangement for reconstruction and rehabilitation efforts. A separate lean and efficient apolitical entity with a fixed operational lifetime would be helpful to expedite decision-making, procurement, and approvals. However, the implementation of reconstruction projects should happen through the line ministries.
4. Ensure robust monitoring and evaluation of reconstruction and rehabilitation efforts. Good governance is essential for effectiveness of such efforts.
5. Continue the ongoing and planned reforms to increase private sector investment. This is particularly important to boost investor confidence in the economy and the country’s ability to effectively deal with the aftermath of the disaster. Some of the reconstruction projects may be initiated on a public private partnership (PPP) basis, for which the government will have to pass the nearly finalized PPP Policy and speedily enact the PPP Act. Other policies and acts prepared or updated with the aim to develop the private sector and increase their investment also need to be passed or enacted in an expeditious manner.

Understanding the impact of the Nepal earthquake on priority affected districts (Part II)

In the preceding blog post, I focused on aspects such as area, population, share in national production, share in agricultural and manufacturing output, poverty and fiscal condition of the 15 severely affected districts. Here, I will focus on migration and remittances, housing, road network, tourism and hydropower.

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Migration: Of the 15 severely affected districts, except for Kathmandu, Lalitpur and Bhaktapur, all other districts have a negative net migration (lifetime migrants). It is computed as the difference between in-migrants and out-migrants (share of population) in each district. The 15 districts together account for about 26.5% of total lifetime out-migrants.

FYI, population aged 5 years and above is considered “in-migrant” if the present district of enumeration is different from the district of residence before five years. The negative lifetime migration indicate a higher out-migration from these districts, which are also backward in terms of both economic activities, infrastructure and employment opportunities. Obviously, Kathmandu, Lalitpur and Bhaktapur have positive net migration because of the relatively better economic and job opportunities.

Another measure of migration is absentee population (household members who are absent from households at the time of enumeration for six or more months). Absentee population is normally out-migrants and largely includes migration for work to India, Gulf countries, Malaysia and South Korea (plus internal out-migrants as well). Together these 15 districts account for 16.7% of total absentee population of about 1.9 million. Absentee population as a share of district population is higher than the national average of 7.3% in Lamjung and Gorkha. These are mostly folks of the working age.

Meanwhile, the number of migrants (excluding individual applicants) leaving the country from these 15 districts accounted for about 19.2% of total migrants (443,483 excluding individual applicants [recruitment agency-based & individual applicants totaled 521,878]) in FY2014. Over 20 workers from Makawanpur, Kavrepalanchowk, Sindhupalchowk, Dhading and Sindhuli legally left the country (through recruitment agency) each day in FY2014.

 

Most of the migrant workers from these districts go to the Gulf countries (UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman) and Malaysia. Malaysia is the top destination. A total of 42,331 workers from Gorkha went abroad for work in FY2014. Malaysia, Saudi Arabia, Qatar, UAE and Kuwait accounted for 97% of the migrant workers from Gorkha. Likewise, a total of 38,409 workers from Sindhupalchowk went abroad for work in FY2014. Malaysia, Saudi Arabia, Qatar, UAE and Lebanon accounted for 94% of the migrant workers from Sindhupalchowk.

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Remittances: Remittance inflow to households support their demand for consumption, education, healthcare and asset accumulation. Survey estimates show that remittances account for about a quarter of household income in Gorkha (27.8%), Dhading (24.7%) and Lamjung (24.7%). Similarly, remittances account for 22% of household income in Sindhupalchowk. The rest comes from agriculture and small scale business activities. Remittances act as an important source of cushion during an income shock (such as the one triggered by the earthquake). Migrant workers tend to remit more money back home immediately after such an income shock. However, in the absence of immediate relief and rehabilitation measures, migrants workers may prefer to come back to their villages. In this case, remittance inflows may decelerate in the medium term. This could impact not only household finances, but also the national fiscal and external balances.

Anyway, as a share of total remittance inflows to Nepal, survey estimates show that Gorkha district accounted for 2.8%, Kathmandu 2.7%, Lamjung 2.1%, Makawanpur 1.6% and Dhading 1.6%. Except for Rasuwa and Okhaldhunga (data not available), the other 13 severely affected districts account for about 16% of total remittance inflows to Nepal.

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Housing: The 15 severely affected districts together accounted for about 23.6% of total households with house/housing unit in Nepal. However, if we take out Kathmandu district, then the remaining 14 districts accounted for about 15.5% of total households with house/housing unit. Importantly, the number of houses consisting of RCC with pillar in Kathmandu accounted for 32.5% of total RCC with pillar house/housing unit in Nepal. The remaining 14 district’s share was just 14.8%. Meanwhile, excluding Kathmandu the remaining districts accounted for about 25% of total households having mud bonded bricks/stone houses. It explains why a lot of the residential houses/housing units were damaged by the earthquake in these districts.

Looking at each districts, the ones which reported the most damage to houses are also the ones that had houses made of mud bonded bricks/stone. These are structurally weaker than houses made of RCC with pillar. Over 90% of households in Ramechhap, Okhaldhunga, Dolakha, Nuwakot and Sindhupalchowk had mud bonded bricks/stone houses/housing units. Similarly, Rasuwa, Gorkha, Dhading, Kavrepalanchowk and Lamjung had about or over 80% of houses made of mud bonded bricks/stone. Less than 5% of houses in most of these districts were made of RCC with pillar.

Consequently, the weak structures were annihilated by the strong earthquake and the ensuring aftershocks. In fact, only 9.9% and 24.9% of total households in Nepal have houses made of RCC with pillar and wooden pillar, respectively. These are mostly in the urban areas. The government has to encourage, and appropriately incentivize, households to construct earthquake resistant houses so that when a strong one strikes next time, most of the houses remain intact. This will also help households to withstand income shock and prevent them from falling below the absolute poverty line. The 15 severely affected districts together had about 0.68 million households with houses/housing units made of mud bonded bricks/stone. Another 0.25 million were made of cement bonded bricks/stone (more than half of them in Kathmandu district).

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Education: According to Census 2011, the literacy rate (6 and more years) in Okhaldhunga, Dolakha, Dhading, Ramechhap, Sindhuli, Nuwakot, Sindhupalchowk and Rasuwa was lower than the national average of 66.6%. Gorkha, Makawanpur, Kavrepalanchowk and Lamjung had literacy rate below 75%.

The 15 severely affected districts accounted for about 23.7% and 21.2% of total schools and community schools, respectively (8,250 schools and 6,213 community schools). Kathmandu district has 1,370 schools, Kavrepalanchowk 969, Dhading 653 and Sindhuli 581. Among the 15 districts, Dhading has the higher number of community schools (608), followed by Kavrepalanchowk (588) and Sindhuli (559). The most severely hit districts have more community schools than regular schools. Note that regular and community school buildings usually serve two purposes: (i) classrooms for teaching, and (ii) a shelter point during emergency or disaster. Nepalese schools so far have focused on the first only (that too poorly built structure). This is an opportunity to ensure that school buildings fulfill both purposes, and for this they need to be rebuilt in such a way that they are earthquake resistant. It has been reported that almost 90% of schools are either destroyed or are uninhabitable in the rural areas/backward districts.

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Roads: The 15 districts together accounted for 19.8% of total strategic road network (SRN). The population influenced by per kilometer of road is the highest in Kathmandu, Lalitpur, Bhaktapur, Kavrepalanchowk and Lamjung— all have per km road influence higher than the national average of 2,131 ‘influenced people’ per km. The map below shows that most of the areas in the upper hilly and mountain regions are yet to be connected by functioning road network.

A more relevant picture regarding the difficulties in delivering relief to the most affected as well as mostly rural districts is given by road density (km per 100 sq km of land area). As expected the most affected districts have a miserable road density statistics. For instance, Rasuwa, Lamjung, Gorkha, Dolakha, Ramechhap and Okhaldhunga have road density lower than the national average of 8 km per 100 sq km of land area. Bhaktapur, Kathmandu and Lalitpur have the highest figures. One of the lessons during the relief operations is that VDCs having access roads (irrespective of the quality!) have gotten relief materials (whatever is the quantity!) relatively faster than places without an access road. Furthermore, houses built after the access road were constructed tend to have some RCC and cemented pillars, provided that households have money (remittance played a role partly) to construct. It meant that these houses for a large part withstood the devastating jolts. Hence, the importance of rural access road, even if they are expensive to construct because of scattered communities/habitat. Rural access roads also help to boost agricultural as well as local business activities.

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Tourism: Tourism is an important part of the economy and employment generation. Even though revenue from tourism accounts for just 2% of GDP, its contribution to employment and SME promotion is large (since it has robust backward and forward linkages). The post-earthquake situation not only impacting tourism in the affected districts, but also total flows to the country and hence the associated economic activities and employment generation (about 1.4 million people were engaged by this sector). Travel and tourism activities include stay in hotels, homes stay, trekking, travel, rafting, airline business, paragliding, ultra light flights, mountain flights, money exchange, small scale tourism related establishments, etc – a whole slew of backward and forward linking activities.

About 0.8 million visitors visited Nepal in 2013. Of these, 51.5% came for holiday/pleasure, and 12.8% for trekking and mountaineering. Mountaineering has been badly hit as climbing is closed for two consecutive years.

A major effort is required to rebuild the trust of visitors.There is also an urgent need to upgrade tourism infrastructure, offer competitive services, conduct effective branding, increase average expenditure per visitor per day (stands at just $43 right now), and increase the number of days a visitor spends in the country.

The earthquake affected districts as well as the adjoining ones have one of the most popular trekking routes, national parks, conservation areas, and recreation hubs. It stimulates local economies on a seasonal basis and sustains thousands of jobs. Furthermore, some of the affected districts are popular for home stays. Kathmandu, Nuwakot, Lalitpur, Ramechhap, Makawanpur and Kavrepalanchowk together accounted for 75.6% of total registered number of affiliated home stay houses in 2013. Similarly, they together accounted for 94.6% of the total rooms available in registered homestay, and 94.8% of total beds.

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Hydropower: According to media reports, about 160 MW of hydroelectricity is not produced right now due to the impact of the earthquake. NEA is importing 210 MW of electricity from India. Although the electricity demand is over 1000 MW, NEA is supplying 564 MW right now. A total of 18 hydropower plants have shut down generation. Some hydropower projects in Sindhupalchowk, Nuwakot, Rasuwa, Dolakha, Lamjung and Dhading are affected by the earthquake.

Generally, hydropower projects are ‘extra engineered’ taking into account the probability of this kind of natural disaster. The electricity demand and supply situation won’t impact much in the medium term as news reports state that most of these are repairable damages that could be done within a few weeks. Furthermore, there has been an increasing amount of electricity import from India. Short-term revenue flows and employment will, however, likely get affected.

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Understanding the impact of the Nepal earthquake on priority affected districts (Part I)

The 7.8 magnitude earthquake that struck Nepal on 25 April has caused widespread loss of lives and property. The scale of devastation is becoming clearer as the rescue operation is winding down and relief operation is picking up pace. The next challenge would be to ensure that reconstruction and rehabilitation is swift, with clear institutional and legal mandate, and strict timeline of deliverables with respect to reconstruction projects. The same bureaucratic set up and decision-making, with political wrangling in between, are not going to be fast enough given the urgency faced by the people and the nation. This topic deserves a separate blog post.

For now, let us look at the significance of the districts severely affected by the earthquake. In this blog piece, I will focus on area, population, share in national production, share in manufacturing and agricultural output, poverty, and fiscal condition. I will focus on infrastructure, migration, remittances, education, housing, etc in the next blog post. I hope that this kind of information will help to shape up the relief, rehabilitation and reconstruction narratives in the right direction.

Severely affected districts: Gorkha, Rasuwa, Sindhupalchowk, Dolakha, Ramechhap, Kavrepalanchowk, Lalitpur, Bhaktapur, Kathmandu, Nuwakot, Makawanpur, Dhading, Okhaldhunga, Sindhuli and Lamjung. The government has designated 14 of these as priority affected area. Note that the earthquake has affected over 40 districts. The damage to lives and property seems to be higher in the listed districts.

Area: Together these 15 districts account for 16.6% of the total area of Nepal.

Population:  Together these 15 districts account for about 23.6% of total households and 20.9% of total population. The youth population (15-24 years) is about 22.8% of total youth population (about one million). In the absence of job opportunities and after maxing out whatever savings they have following the relief phase, these youth are the prime candidates for migration overseas for work (on top of those that have already migrated). It could impact local economic activities, create shortage of labor,  increase wages, and potentially slowdown recovery and reconstruction operations.

Furthermore, a majority of the affected districts have a sex ratio that is unfavorable to rescue, relief and reconstruction operations. Particularly, these districts have lower male per 100 female than the national average of 94.2. For instance, Gorkha (which also had the epicenter of the earthquake) has just 81 male per 100 female. Sindhupalchowk has 93 male per 100 female. This indicates a high migration trend in search for job overseas (mostly to the Gulf countries) and within the country (mostly to Kathmandu Valley, and the major industrial and trading hubs in Terai region). As they return to take care of family members and rebuild their houses, it is very important to devise appropriate measures and incentives (public works program, conditional cash transfers, etc— broadly, social protection measures) to retain them in the villages so that reconstruction activities are fast and in the right direction.

Poverty:  Together these 15 districts account for about 13.6% of the total number of people living below the poverty line. Sindhuli, Rasuwa, Makawanpur, Dolakha, Ramechhap and Sindhupalchowk have poverty rate that is higher than the national average (25.2%). These districts are also the most affected by the earthquake, and are likely to see more people pushed below the poverty line in the absence of immediate income compensating source/transfer. More on poverty by district here.

Similarly, pretty much the same districts have lower HDI value than the national average (0.49). Note that higher HDI value indicate relatively better human development.

Economic activities: Together these 15 districts account for about 31% of estimated national GDP. Specifically, they account for 16.3% of total agricultural production, 30.3% of total industrial production, and 42.7% of total services production. A majority of it is accounted for by Kathmandu district, which has a relatively larger industrial and services base. Understandably, agriculture’s contribution is low because the Terai region, which is relatively less affected by the earthquake, is the main bread basket of Nepal. Despite the low contribution of agriculture in these districts (except Kathmandu), a large proportion of the population is directly or indirectly engaged in agricultural activities for livelihood. Hence, the impact on livelihood opportunities is going to be particularly painful.

Agriculture: Together these 15 districts account for about 18.1% of the total number of agricultural holdings, and 14.5% of the total area of agricultural holding. The area of agricultural holding is not that large (most of it is concentrated in the Terai region), but it is still the major source of livelihood.

Furthermore, rearing livestock is also a main source of income. Per unit livestock in most of these districts (excluding Kathmandu, Lalitpur and Bhaktapur) is higher than the national average. The earthquake took lives of many livestock in these districts. It could eventually push more people below the poverty line in the absence of immediate income compensating source/transfer because livestock (and house) is one of the main assets of people who are in the lowest 40% income bracket.

Per unit livestock by district
District	Cow/Ox	S/He buffalo	Yak/Nak	Goat	Sheep	Pig
Gorkha	2.9	2.0	7.6	5.7	8.2	1.6
Rasuwa	3.4	2.1	8.5	6.1	13.6	4.2
Sindhupalchowk	2.3	1.8	10.5	5.3	7.7	2.0
Dolakha	2.5	1.8	17.3	5.5	4.9	1.9
Ramechhap	2.4	1.8	16.8	5.5	5.3	1.6
Kavrepalanchowk	2.0	1.8	0.0	5.2	5.2	2.2
Lalitpur	1.9	2.4	0.0	5.1	5.2	4.8
Bhaktapur	1.6	1.4	0.0	3.6	3.5	6.6
Kathmandu	1.7	1.6	0.0	4.4	4.1	8.1
Nuwakot	2.3	1.9	4.3	5.4	7.6	2.4
Makawanpur	2.9	1.8	0.0	6.9	5.5	2.0
Dhading	2.7	1.9	2.5	6.0	6.5	1.9
Okhaldhunga	3.1	2.2	8.5	5.4	6.0	1.6
Sindhuli	3.5	2.1	0.0	6.4	6.2	1.6
Lamjung	2.5	2.1	0.0	5.3	7.1	1.9
NEPAL	2.8	1.9	7.8	4.6	6.2	1.8

Meanwhile, these 15 districts together account for 9.7% of total area for paddy plantation  and 10.1% of total paddy production. The plantation area and production share is above 20% in the case of maize, millet and buckwheat. Nuwakot, Makawanpur and Sindhupalchowk are the top paddy, maize and millet producers, respectively. Hence, in terms of national output, there won’t be much direct impact on agricultural production as most agricultural goods are largely grown in Terai region. However, indirectly the shortage of labor and below normal monsoon forecast for FY2016 may impact national production. Importantly, even if the impact on total agricultural production is minimal, its impact on livelihood, employment, and poverty would likely be significant in the earthquake affected districts.

Small business: Together the 15 districts account for about 30.9% of total households engaged in cottage industry. Similarly, 25.3% in the case of business and 21.9% in the case of services. Overall, 24.5% of small businesses in the country is accounted for by these 15 districts. Measures to promote small business (finance, value chain development, supply management, skills development, etc) may be effective in recovery/rehabilitation phase, which will also help to prevent folks from falling below the poverty line due to the income shock caused by the earthquake.

Manufacturing: Together the 15 districts account for 20.1% of total manufacturing establishments in the country. They provide 21% of the total jobs in manufacturing establishments and account for 17.5% of total value added. A majority of it is accounted for by Kathmandu, Makawanpur, Bhaktapur and Lalitpur. Hence, there might be some slowdown in manufacturing activities in FY2016. Furthermore, the increase in transportation costs (ferrying raw materials from border to manufacturing plants nationwide) and shortage of labor may lower production and put upward pressure on inflation.

Fiscal situation: Only Sindhupalchowk and Lalitpur had revenue in excess of expenditure in FY2012. Together these 15 districts accounted for 47.9% of total revenue, 58.1% of total capital spending, and 12.7% of aid disbursement (excluding national projects). Kathmandu, Lalitpur and Sindhupalchowk accounted for 30.9%, 14.1% and 1.3% of total revenue in FY2012, respectively. All other districts’ share was less than one percent—indicating that not much economic activities happen in these districts (alternatively, industrial and services activities are minimal). These districts will require much higher level of resource transfer (grants) as well as capital spending for reconstruction and rehabilitation.

Nepal earthquake and migration

Excerpts from a NYT story on Nepal earthquake and migration of young men:

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The absence of young men has been keenly felt over the last week, as those left alive in isolated villages dug with their hands trying to free survivors. Many of the children caught up in the earthquake’s destruction were already growing up without fathers at home. Frail older people have been left to manage the aftermath on their own. And economists say that unless the government acts swiftly to create work opportunities at home, the exodus of young people will accelerate after the relief operation ends, permanently handicapping the country’s ability to rebuild.

[…]‘‘The government has to create a relief package if they want to retain them,’’ said Chandan Sapkota, chief economics officer at the Asian Development Bank in Kathmandu. ‘‘Somebody needs to plow the field, plant the rice. If these temporary migrants are given enough incentives to stay in the village, their first instinct would be to do that. But it has to be really fast.’’

[…]The Asian Development Bank has already downgraded its projections for economic growth in Nepal to 4.2 percent this year, from 4.6 percent before, but Mr. Sapkota said he now believed the fall would be steeper, to the range of 3 to 3.5 percent. The tourism industry, which had been growing and contributing about 9 percent of the country’s total output, is now expected to drop off sharply.

Though men will be kept busy during the initial relief effort, but when it ends, Kathmandu’s factories and construction sites could face a labor shortage, Mr. Sapkota said, as many workers return to their native villages to rebuild houses. Jobs in the villages are scarce, though, so once that work is done, many will conclude that they can best help their families by going abroad and sending their earnings home.

‘‘If you are with your family, but without a job, without money, how exactly are you going to help?’’ he said.

The country’s absent young men have been sorely missed over the last week, according to Kanak Mani Dixit, the founding editor of Himal Southasian magazine and one of Nepal’s most prominent journalists. It has been felt at funerals, where, according to custom, bodies are carried on bamboo poles without being laid down, sometimes for hours, until the burial party reaches a riverbed. And their absence had a profound effect when the earthquake struck, said Mr. Dixit, who said he went to help an elderly neighbor who lived alone after he had moved his own parents to safety.

“The young adults — the sons — are mostly away, in Malaysia, the gulf, indeed parts of India,” he said. “The house shudders, and you cannot be assisted. You are slow. And you get caught.”

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Initial analysis of the economic impact of the Nepal earthquake

This blog piece is cross-posted on Asian Development Blog. Here is my earlier reflection on the Great Earthquake in Nepal.

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ADB’s initial analysis of the economic impact of the Nepal earthquake

Clearly the poorest in the country, with fewer resources to fall back on, will suffer the most from the disaster in a country where 25% of the population lives below the poverty line.

The 7.8 magnitude earthquake that rocked Nepal on 25 April and the many subsequent aftershocks have imposed a huge human and economic toll on the country, with over 5,000 deaths and some 11,000 injured. Millions of people have been affected in other ways.

Roads, bridges, water supplies, schools, hospitals, and homes in the main cities and in rural areas across more than two-thirds of Nepal’s 75 districts have suffered damage. Major roads to neighboring countries still seem usable though.

Clearly the poorest in the country, with fewer resources to fall back on, will suffer the most, and many will likely fall back below the government’s national poverty line of NRs19,261 per person per year (average 2010-11 prices). This is particularly the case in rural areas, where 27.4% of the population lives below the poverty line. Overall, 25% of the population in Nepal lives below the poverty line.

Estimating the exact economic cost will be an ongoing process, but these are our initial thoughts.

Economic growth. Nepal’s economy grew by an estimated 5.2% in fiscal year (FY) 2014 (ending 15 July 2014), its highest rate since the global recession. Production activities, especially in the service sector, have been severely disrupted by the earthquake mainly due to damage to physical infrastructure and distribution networks. Travel and tourism is likely to be badly hit with most key hotels shutting down for the coming few weeks in order to examine the structural integrity of their buildings. Although this sector’s direct and indirect contribution was only about 9% of gross domestic product (GDP) in FY2014, it is one of the fastest-growing sectors and has significant backward and forward linkages in terms of employment and production. Hence, the impact of the likely drop-off in tourism will be significant. In addition, banks and financial institutions are only partially operating, which will restrict the credit supply to businesses and households. In March, ADB had projected 4.6% growth for FY2015. We now estimate that the growth rate will decline to 4.2%. If the supply-side disruptions intensify in the coming weeks, then the growth forecast may be further downgraded to somewhere between 3% and 3.5%. Meanwhile, GDP growth is expected to rebound strongly in FY2016 given that a forecast of a better monsoon than in FY2015 should boost agricultural output and the anticipated accelerated expenditure on rehabilitation and reconstruction should boost economic activities.

Inflation. In March, ADB projected inflation to moderate to 7.7% for FY2015, down from 9.1% in FY2014. However, due to supply side constraints following the earthquake, we now see it edging up to 8% in FY2015. Food inflation is expected to remain in double digits as a result of high prices of cereal grains and vegetables following to the earthquake. A shortage of fuel and higher transportation costs may also cause non-food inflation to edge upward. Inflation is expected to tick down to around 7.3% in FY2016 after the shortage of food and non-food items has eased.

Fiscal balance. In the short run, capital spending will be slow due to the significant disruption in labor and financial flows, and contract awards. The implementation and disbursement of some ADB projects may face delays for this same reason. In the medium term, a lot of reconstruction work will depend on government approvals and the pace of project implementation. Nepal’s fiscal situation has been manageable in recent years, even registering a surplus equivalent to 0.1% of GDP in FY2013. As in FY2014, the country is expected to run a small fiscal deficit in FY2015 and FY2016. The country can comfortably afford to run a moderate fiscal deficit to finance reconstruction projects, which will also serve to stimulate the economy.

Current account balance. Another impact of the earthquake could be seen on workers' remittances. Official remittance inflows are expected to increase immediately following the earthquake (expecting such trend starting the last month of FY2015 and mostly in FY2016). Potential migrant workers might defer travel and instead stay with family members; some workers working abroad might come back to take care of family matters. The net flow is harder to predict at the moment but net remittances are not expected to change drastically from the levels forecast in the Asian Development Outlook 2015 (ADO 2015), of about 25% of GDP. The current account has remained surplus since FY2012 and was about 4.7% of GDP in FY2014. In line with the ADO 2015, the current account surplus is still forecast to decrease to about 2.7% of GDP. This is largely due to the already decelerating official remittance inflows (and not expecting to change drastically except for the last month of FY2015 plus higher non-oil import bill that is widening trade deficit). Accordingly, the balance of payments surplus will also fall in FY2015. Foreign exchange reserves will continue to be enough to finance over 9 months of import of goods and services.

The immediate priorities for the government will be to:

1. Manage relief and logistic operations effectively.
2. Smoothen institutional coordination in both the relief and reconstruction phases.
3. Conduct a detailed needs assessment of the rehabilitation and reconstruction of physical infrastructure and a corresponding timeline of events and milestones to fully utilize internal and external assistance.
4. Ensure good governance of the relief and reconstruction efforts.
5. Focus the next budget for FY2016 on relief, rehabilitation and reconstruction.
6. Continue ongoing and planned reforms to increase private sector investment.