Post earthquake reconstruction in Nepal (BBC Sajha Sawal)

Initial views on reconstruction conference and governance of aid

Speaking live on Channel News Asia, 25 June 2015. Here is an earlier news on the same topic. A detailed blog on this topic over the weekend.

 

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For those interested here are related news stories, where I have been quoted:

• Foreign Donors Pledge $3 Billion to Help Rebuild Quake-Ravaged Nepal, The New York Times, 25 June 2015
• Nepal donors pledge $3bn for rebuilding in aftermath of earthquakes, The Guardian, 25 June 2015
• Quake-hit Nepal appeals for aid to rebuild country, AFP, 25 June 2015
• Nepal Struggles to Recover From Devastating Quakes, Wall Street Journal, 23 June 2015

Forecast of key macroeconomic trends till 2050

Here are some of the highlights from The EIU’s long-term macroeconomic forecast. Look at the prominence of India and China, and imagine how Nepal can prosper through trade and investment cooperation (along with decisive tackling of binding constraints to growth).

1. China and India will be the first and third largest economies, respectively, by 2050. China will overtake the US in 2026 in nominal GDP in US dollar terms. India is expected to grow at an average 5% up to 2050. China’s nominal GDP is expected to be $105 trillion and India’s 64 trillion by 2050. The US economy will be of about $71 trillion.

2. Several Asian countries will rise up the economic ladder. Asia will account for over 50% of global GDP by 2050.

3. Population growth (and working-age population) will continue to decline (labor is a major source of growth).

4. Developed countries will continue to have higher income per capita than China and India. Sweden will have income per capita of about $174,995. China and India will register higher income per capita growth rates. An Indian consumer’s spending power will reach 24% of a US consumer’s spending power by 2050 (up from 3% in 2014). A Chinese consumer’s spending power will reach about 50% (up from 14% in 2014).

Post-earthquake needs requirement estimated at 31.4% of GDP in Nepal ($6.66 billion)

The near-final post disaster needs assessment (PDNA) estimate was disseminated by the NPC today and is widely reported in the media. There may be minor adjustment later on as per the updated information/data, but the overall needs estimate should be around $6.7 billion.

Using an exchange rate of NRs100 = US$1 and FY2015 GDP estimate (preliminary), below are the estimates:

• Damage: $5.13 billion (24.2% of GDP)
• Loss: $1.87 billion (8.8% of GDP)
• Total disaster effect (damage and loss): $7.00 billion (33% of GDP)
• Lost personal income: $171.3 million (0.8% of GDP)
• Total needs for reconstruction and rehabilitation: $6.66 billion (31.4% of GDP)

Nepal Post-Disaster Needs Assessment
Sector	Damage (NPR millions)	Loss (NPR millions)	Total Disaster Effect (NPR millions)	Lost Personal Income*	Total Needs (NPR millions)
Agriculture	16,405.0	11,962.0	28,367.0	4,603.3	15,560.0
Communications	3,610.2	5,084.6	8,694.8		4,938.8
Community Infrastructure	3,349.0	0.0	3,349.0		4,451.0
Cultural Heritage	16,909.0	2,313.0	19,222.0		20,566.9
Disaster Risk Reduction	17.5	137.4	154.9		8,204.0
Education	28,063.8	3,254.3	31,318.1		39,705.0
Electricity	17,807.0	3,435.0	21,242.0		18,586.1
Employment and Livelihoods			0.0		12,548.0
Environment and Forestry	32,960.0	1,061.0	34,021.0		25,197.0
Financial Sector	4,394.0	26,891.0	31,285.0		32,856.0
Gender and Cross Cutting Issues					1,085.0
Governance	16,690.0	0.0	16,690.0		16,644.0
Health and Population	5,197.4	1,139.4	6,336.8		11,269.0
Housing and Human Settlements	303,631.0	46,748.0	350,379.0		327,762.0
Industry and Commerce	17,408.0	16,874.0	34,282.0	6,321.6	27,405.0
Irrigation	382.8	0.4	383.2		467.2
Nutrition					5,036.0
Social Protection					6,398.0
Tourism	18,862.0	62,379.3	81,241.3	6,200.2	41,336.4
Transport	17,188.0	4,930.0	22,118.0		28,185.0
Water and Sanitation	10,505.7	873.4	11,379.1		18,106.1
Total NPR mil.	513,380.4	187,082.8	700,463.2	17,125.1	666,306.4
Total USD mil.	5,133.8	1,870.8	7,004.6	171.3	6,663.1
Share GDP	24.2	8.8	33.0	0.8	31.4

Almost half of the losses, damages and needs are accounted for by the housing and human settlement cluster. Over 0.5 million houses (99% of them private) were destroyed by the earthquake.

Housing cluster accounted for:

• 59.1% of total damage (14.3% of GDP)
• 25% of total loss (2.2% of GDP)
• 50% of total damage and loss (16.5% of GDP)
• 49.2% of total needs (15.4% of GDP)

Infrastructure cluster accounted for:

• 10.2% of total damage (2.5% of GDP)
• 7.7% of total loss (0.7% of GDP)
• 9.5% of total damage and loss (3.1% of GDP)
• 11.1% of total needs (3.5% of GDP)
• Includes communications, community infrastructure, electricity, transport, water and sanitation

Productive cluster accounted for:

• 11.2% of total damage (2.7% of GDP)
• 63.1% of total loss (5.6% of GDP)
• 25.1% of total damage and loss (8.3% of GDP)
• 100% of total income lost personal income (0.8% of GDP)
• 17.7% of total needs (5.5% of GDP)
• Includes agriculture, financial sector, industry and commerce, irrigation and tourism

Nepal earthquake caused gross value added loss of about $371 million in FY2015

The Central Bureau of Statistics released preliminary estimates of GDP growth for FY2015 (ends 15 July 2015). It provides data on pre-earthquake estimate of GDP growth (was supposed to be released on April 26, but it was delayed due to earthquake on April 25) and post-earthquake growth estimate based on the latest data.

It has projected GDP growth to decline by 1.5 percentage points to 3% in FY2015 due to the impact of the earthquake (considering two decimal points gives 1.54 percentage points decline!). Pre-earthquake growth estimate for FY2015 was 4.6%. The growth estimate is on the lower end of ADB’s earlier estimate, which said that growth could drop to as low as 3% if supply disruptions become more intense than initially anticipated. The 7.8 magnitude earthquake struck Nepal in the tenth month of fiscal year FY2015. Pre-earthquake estimate is based on 22 April forecast. Post-earthquake estimate is based on 8 June forecast.

GDP_NEPAL	FY2014R	FY2015 post-EQ	FY2015 pre-EQ
GDP growth rate (basic prices)	5.1	3.0	4.6
Agriculture	2.9	1.9	2.3
Industry	6.2	2.7	4.6
Services	6.4	3.9	6.0
Composition of GDP (%)
Agriculture	33.1	32.3	31.9
Industry	14.5	14.5	14.6
Services	52.4	53.2	53.5
GDP (current producers prices)
GDP, NRs billion	1941.6	2124.7	2161.2
GDP, $ billion	19.8	21.6	21.9

Agriculture sector is expected to grow by 1.9%, industry by 2.7% and services by 3.9%. The sharp drop in agricultural output is primarily due to the negative impact of delayed and weak monsoon in the first half of FY2015, and later the loss of livestock due to the earthquake.

Meanwhile, the slowdown in industry sector is due to the drastic drop in quarrying (stones, aggregates, sand and soil extraction slowing down in affected districts, and the government’s policy to temporarily halt building activities till mid-July), manufacturing (physical damage, labor shortage and weak demand), and construction (policy to temporarily halt building activities, low corrugated sheet production, etc).

Services sector is affected heavily due to the slowdown in wholesale and retail trade, tourism activities (affects air transport, and hotels and restaurants businesses), and real estate, renting and business activities. Wholesale and retail trade grew by 9% in FY2014, but dropped to 3.4% after the earthquake (pre-earthquake growth 5.6%) in FY2015. This is primarily due to the slowdown in agricultural production and imports of goods after the earthquake. Hotels and restaurants suffered due to slowdown in tourist arrivals, physical damage to hotels and restaurants, and decline in domestic tourism. Furthermore, real estate activities were in line with the substantially lower land related transactions. There was also a substantial slowdown in renting business due to physical damage to buildings.

Overall, agricultural, industry and services sectors contributed 0.6, 0.4 and 2.1 percentage points to GDP growth of 3% (at basic prices). Nepal’s GDP is estimated to be $21.6 billion in FY2015 ($371 million less than what would have been in a no-earthquake scenario). Overall, gross output loss is estimated at $529 million in FY2015.

GDP_NEPAL ($, million)	FY2014R	FY2015 pre-EQ	FY2015 post-EQ	Losses
Gross output (basic prices)	29,092	31,953	31,424	529
Intermediate consumption	10,769	11,743	11,532	210
Gross value added (GDP)	19,770	21,948	21,577	371

FYI, gross output is the total value of all goods and services produced during the accountancy period (at basic prices). Intermediate consumption is the total value of goods and services consumed as inputs by production processes (at purchasers’ prices). Gross value added is the difference between gross output and intermediate consumption. Finally, GDP is equal to gross value added plus taxes minus subsidies.

The earthquake lowered per capita income by $23 compared to the no-earthquake scenario (when per capita income would have been $785). Accordingly, real per capita income increased by just 0.6% against 3.6% in no-earthquake scenario).

A good project manager matters for good project outcomes

Here is an abstract of a recent policy research working paper by Hulman, Kolkma and Kraay:

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Understanding the role of country versus project characteristics is important to large aid donors that implement many projects in a broad cross-section of countries. In a sample of 3,821 World Bank projects and 1,342 Asian Development Bank projects, project outcomes vary much more within countries than between countries. Country-level characteristics explain only 10–25 percent of project outcomes. Among macro country-level variables, country growth and the policy environment are significantly positively correlated with project outcomes. Among micro project-level variables, shorter project duration and the presence of additional financing are significantly correlated with better project outcomes. In addition, the track record of the project manager in delivering successful projects is highly significantly correlated with project outcomes. There are few significant differences between the two institutions in the relationship between these variables and project outcomes.

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Main points related to WB and ADB projects:

• Country-level characteristics explain only 10-25% of project outcomes.
• Civil liberties and political freedom at the country level are negatively correlated with project outcomes.
• Projects that take longer to implement are less likely to be successful. Extending projects to attempt to achieve goals in spite of hitches during implementation may not always be successful.
• Difference between actual and initially-planned funding is positively correlated with project outcomes (projects that are not doing well need to be closed early).
• Track record of project manager (task team leader/project officer)  is a very strong correlate of eventual project outcomes. [“Project manager turnover in WB projects is more likely to be driven by poor project performance, while in the ADB turnover is driven by other institutional factors. In this case, project outcomes would not be correlated with project manager turnover in the ADB.”]
• Significantly larger proportion of WB projects receive negative ratings in their first half when compared to ADB projects. [“An alternative explanation is that ADB project managers may be less willing to report problems early on. For example, ADB project managers may only be willing to admit to bad interim ratings if projects have only “small” or more “solvable” practical problems (such as procurement delays, etc.), and underreport more intractable problems related to ultimate outcomes. In other words, the positive observation that of those projects flagged as problems in the first half, the ADB has a better "turnaround rate," may not be entirely good news, to the extent that the projects being flagged as problems by project managers are ones where the problems are relatively easy to fix.”]
• Fewer ADB projects are flagged as possible problems than in the WB. [“This could possibly indicate lower candor on the part of ADB project managers, because overall project success rates are not so different between the two institutions.”]
• Detailed project designs and procurement packages need to be prepared prior to project implementation.

Aspects of prudent fiscal management in small states

The IMF has come up with a  staff report that outlines macroeconomic policies for small developing economies, particularly in light of the lower oil prices and exchange rate volatility.

Here are some of the takeaways on fiscal management.

Expenditure

• Diseconomies of scale in providing public goods and services means recurrent spending are typically large (plus indivisibility of public goods)
  • Recurrent spending is rigid
• Growth-promoting capital spending is important
  • Sequencing the implementation of capital projects is also important
  • Impact of capital spending on growth is stronger
• Helpful to use fiscal anchors to smooth volatility of revenue and capital expenditure over the business cycle
  • Strengthen medium-term orientation of fiscal policy as opposed to year-by-year basis only
  • Fiscal anchors should be country-specific and kept simple
• Increasing public debt after a certain threshold do not support growth
  • 30% of GDP for small states in the Asia and Pacific (?)
  • Preserving fiscal space for growth-enhancing investment, including infrastructure spending, is important
• Government expansion led by capital spending results in higher real GDP per capita and lower public-debt-to-GDP ratios (about 2%) than do expansions by recurrent spending (about 10%)
  • However, quality investment in terms of project selection and implementation, returns on investment, and sources of financing determine the impact of public spending on growth
• Impact of public investment on real GDP growth in small states is lower than in larger states
  • Lower fiscal multipliers because capital inputs are mainly imported
  • Weaker PFM frameworks prevent efficient public investment
• Higher population dispersion is associated with lower efficiency in education and health expenditures

Revenue

• Government revenue is volatile due to the exposure to exogenous shocks and narrow production bases
  • Hard to finance temporary fiscal shocks because domestic banking systems are shallow and they have limited access to international capital markets
  • Revenue volatility expected to continue due to the recent large drop in oil prices
  • Sources of volatility depend on cyclical as well as non-cyclical factors
• Natural disasters in small states also cause revenue volatility
  • A natural disaster that affects 1% of the population is associated with a drop in real revenue of 0.2 percentage point.
• Strengthening revenue administration is key
  • A proper mix of income and consumption taxations is desirable

Fiscal resilience

• Pro-cyclical fiscal bias is not desirable (revenue rises, then expenditure rises)
  • Building fiscal buffers for countercyclical support and creating policy space for spending on infrastructure may enhance resilience
• Fiscal anchors to insulate the budget from revenue volatility is key as it minimizes revenue volatility and ensures debt sustainability
  • Country-specific fiscal anchors is desirable to better reflect both short-term cyclical and medium-term sustainability goals
  • Saving windfall revenue to avoid fiscal pro-cyclicality
  • Need to go hand in hand with medium-term orientation of fiscal policy and design of quality public investment projects
• Improving the spending mix toward investment in human and physical capital is helpful.
  • Requires spending reform and medium-term expenditure frameworks
  • Reallocate resources toward priority spending, especially infrastructure investment, education and health sectors
  • Effectively identify, prioritize, and implement public investment projects