Outmigration trend in Nepal: Absentee population, destination and reasons

Based on the population census data (see blog post on demographic dividend and structural transformation using the same dataset), this blog post highlights key features related to absentee population (basically those who outmigrated for more than 6 months). Overall, the total absentee population increased to 2.2 million in 2021, which is over 3 times the number in 1991 (before the Maoist insurgency). In 2021, absentee population was 7.5% of total country's population, up from 7.3% in 2011 and 3.3% in 2001. 

Most of the absentees were out of the country due to salary or seeking job (77.3%), followed by dependent (10.4%), and study or training (9.6%) among others. Historical trend shows that while the share of absentees in India are decreasing, especially after 1991, the share of absentees in the Middle East and ASEAN countries is increasing. Recorded remittance inflow was as high as 25.5% of GDP in FY2015 and FY2016. It decreased to 22.7% of GDP in FY2023. 

Increasing outmigration

Large scale outmigration and subsequent remittance inflows have been defining features of the economy. The total absentee population, defined as those absent from household and gone abroad for more than six months before the census date, increased to 2.2 million in 2021, which is over 3 times the number in 1991 (before the Maoist insurgency). Of the total absentee population in 2021, 82.2% were male and 17.8% female. The share of male and female migrants in 2011 (1.9 million total absentee population) was 87.6% and 12.4%, respectively, indicating the more outmigration is being popular among females as well.

Most of the absentees were out of the country due to salary or seeking job (77.3%), followed by dependent (10.4%), and study or training (9.6%) among others. The share of absentees who identified study/training or dependent has increased compared to 2011 (5.8% and 6.8% in 2011), indicating the preference for study or training abroad (consistent with the increase in ‘no objection’ letter for abroad study or training), and spouse or children following their partner or parents abroad.

About 30% of the absentees in 2021 were of the 20-24 age group, and 76% of the 15-34 years age group, indicating the most of the outmigrants are young and the most active among the working age population. The largest number of absentees are in the Middle East countries (36.7%), followed by India (34%), ASEAN including Malaysia (9.1%), and other Asian countries (5.7%) among others. Among the absentees in the 15-35 age group, 38.8% are in the Middle East, 29.8% in India and 9.8% in ASEAN (including Malaysia). 

Historical trend shows that while the share of absentees in India is decreasing, especially after 1991, the share of absentees in the Middle East and ASEAN countries is increasing. It reflects the liberalization in passport issuance, and various push factors such as the lack of opportunities at home (alternatively, the opportunities in destination countries), and the political instability including the decade-long insurgency. 

Migration destinations have been shifting towards advanced countries as well. For instance, the share of absentees in European countries (including the UK) increased to 5.1% in 2021 from 1.6% in 2001. In Australia (popular amongst students and skilled workers) and Pacific countries, it increased from 0.3% to 4.3% over the same period. In USA and Canada, it increased from 1.3% to 4.0% over the same period. 

Almost 95% of those who went to the Middle East identified job (salary/wage, seeking job) as the main reason for being absent. Similar is the case with ASEAN countries. About 75% of the absentees who were in India identified job as the main reason. In the case of Australia, 70.3% identified study or training as the main reason. In USA and Canada, this was 41.0%. 

About 32% of the absentees were out for 1-2 years, and 27.5% for 3-5 years. It means that about 70.5% of the absentees were out for less than 5 years. Another 25.9% were absent for between 6 and 24 years. 

About 70% of the absentees had education up to SLC level (grade 10), 17% intermediate, 5.3% graduate, and 1.9% postgraduate. 

Annual outmigration

Data from the Department of Foreign Employment (DOFE), which records those migrant workers that take labor permit to work overseas, shows that outmigration is picking up pace after continuous decline since FY2015. It decreased to just 72,081 in FY2021. However, as international travel eased and economies started opening, outmigration has increased to level (497,704) close to the peak outmigration in FY2014 (527,814). About 44.1% of the migrants went to Malaysia, followed by UAE (11.9%), Saudi Arabia (11.2%), and Kuwait (4.0%) among others. 

Recorded remittance inflow was as high as 25.5% of GDP in FY2015 and FY2016. It decreased to 22.7% of GDP in FY2023.

Structural transformation in Nepal: Employment, sectoral shift and labor productivity

Based on the population census and national accounts data (also see blog post on demographic dividend), this blog post highlights key features related to structural transformation (employment, sectoral shift in output). Overall, the share of employment in agriculture is decreasing, but the share of employment in services in increasing. Industry sector's share in employment is recovering, but it is still below the peak in 2001, after which the political instability along with the intensification of the Maoist insurgency, power cuts, and poor industrial relations decreased its share in employment and GDP. It started to recover in the last decade. 

The sectoral shift in GDP follows the pattern in sectoral shift in employment but the pace of change is not commensurate -- services sector value added GDP grew at a faster pace than its share in employment, and industry's share in employment decreased at a faster pace than the decrease in its share in GDP. It means that the largest sector in GDP and its expansion was not jobs centric.

Labor productivity barely increased between 2011 and 2021 and productivity growth was negative in all sectors, with the highest dip in industry sector. At the broad economic activity level, labor productivity was positive in mining and quarrying; manufacturing; and public administration, defense, education, and health, etc. Manufacturing’s share in employment and GDP has decreased, but labor productivity has increased. Construction’s share in employment and GDP has increased but labor productivity has decreased. Labor productivity in wholesale and retail trade has reduced but its share in employment and GDP has increased. 

Structural change: sectoral value added and employment.

The share of employment in the agriculture sector is decreasing but the share of employment in the services sector is increasing. However, the shift in employment does not match the pace of shift in sectoral value added. The population census includes those who were employed as well as those not usually active in the last 12 months before the census date in employment figures, i.e. they had performed any economic activity in the reference period.

1981: The share of agricultural value added in GDP was 60.9%, industry 12.4% and services 26.7%. The share of employment (as a share of those that had performed any economic activity in a reference period of the last eight months or 12 months before census date) in agriculture, industry and services sectors was 91.1%, 0.6% and 6.4%. The remainder did not state sectoral employment.

2001:  The share of agricultural value added in GDP was 36.6%, industry 17.3% and services 46.1%. The share of employment in agriculture, industry and services sectors was 65.7%, 13.4% and 20.7%. The remainder did not state sectoral employment. 

• Note that between 1981 and 2001, while the share of both agricultural employment and gross value added decreased almost by the percentage points, the share of industry sector employment increased faster than the increase in its share in GDP (14.3 vs 4.9 percentage points). Meanwhile, services gross value added in GDP grew at a faster pace than the share of services employment. 
• In essence, between those 20 years, the industrial sector exhibited jobs-centric growth.  

2011: The share of agricultural value added in GDP was 33.4%, industry 14.5% and services 52.0%. The share of employment in agriculture, industry and services sectors was 64.0%, 9.5% and 24.0%. The remainder did not state sectoral employment. 

• Note that between 2001 and 2011, the shift in agriculture (as a share of GDP) was faster than the shift in agriculture employment (decrease by 3.1 percentage points versus 1.7 percentage points). While industry’s share in GDP decreased by 2.7 percentage points, employment in industry sector decreased at a steeper rate of 3.8 percentage points. Meanwhile, services’ share in GDP increased by 5.9 percentage points but employment increased by 3.3 percentage points. 
• In essence, the industrial sector was not jobs centric as the decrease in employment was faster than the decrease in its share of GDP. Likewise, the gain in employment in the services sector was at a lower pace than the increase in its share of GDP.

2021: The share of agricultural value added as a share of GDP was 36.6%, industry 17.3% and services 46.1%. The share of employment in agriculture, industry and services sectors was 65.7%, 13.4% and 20.7%, respectively. The remainder did not state sectoral employment.

• Note that between 2011 and 2021, pretty much the same trend held like in the previous decade, and the share of services sector in GDP grew at a faster pace than its share in employment, indicating that the services sector growth was not jobs centric.

So, what were the structural changes in the last 30 years, the period which endured the Maoist insurgency, the overthrow of the Shah dynasty, the transition to a federal democratic republic, catastrophic earthquakes, and COVID-19 pandemic. 

While the share of agriculture and industry in GDP decreased, the share of services sector increased. The share of employment in these sectors also followed the same pattern, but at a varying pace. The agriculture sector’s share in GDP decreased from 47.7% in 1991 to 25.8% in 2021. The industry sector’s share in GDP decreased from 17.5% in 1991 to 13.8% in 2021. However, the employment in this sector increased from 2.7% to 12.6% in 2021. Employment between 1991 and 2001 increased but as the political instability intensified, it decreased between 2001 and 2011 and then recovered between 2011 and 2021. The services sector’s share in GDP increased from 34.8% of GDP in 1991 to 60.4% of GDP in 2021. Employment in the sector increased from 15.1% to 30.0% of the total employed over the same period. 

The overall trend is that agricultural value added and agricultural employment followed almost the same pattern (decreased by 21.9 percentage points and 23.9 percentage points), but there was employment gain in the industry sector despite a decrease in its share in GDP (9.9 percentage point increase versus 3.7 percentage point decrease). The services sector GVA grew at a faster pace than employment in the sector (increase by 25.6 percentage points versus 14.9 percentage points).

What could be the underlying reasons for these changes? The rural-urban migration has impacted agriculture activities and employment. In the industry sector, the share of employment is the highest in construction sector (8.1% in 2021 compared to 0.5% in 1991), indicating the boom in real estate and construction activities that were driven by the inflow of remittances. The share of employment in the manufacturing sector declined from a high of 8.8% in 2001 to 3.8% in 2021. This sector was one of the most affected by conflict, and policy as well as political instability, leading to fast erosion of cost and price competitiveness to imported goods. In the services sector, most people are employed in the wholesale and retail trade and repair of motor vehicles and motorcycles activity (12.5%), which also is the largest services sector activity as a share of GDP. About 2.2% were employed in transportation and storage, and 2.9% in education. 

FYI, in 2021, about 8.6 million people were employed in the agricultural sector, 2.0 million in the industry sector (of which 0.5 million in manufacturing and 1.2 million in construction), and 4.5 million in the services sector (of which 1.9 million in wholesale and retail trade). It includes those who had done any economic activity in the reference period (employed [10.3 million] and those not usually active [4.7 million]).

The number of hours worked has also decreased. About 65.5% of those who did economic work worked for 6 months and above, 18.2% between 3-5 months, and 16.2% less than 3 months. In 1991, 91.3% of those engaged in economic work worked for 6 months and above, 6.0% between 3-5 months, and 2.2% less than 3 months. It may, again, reflect the increasing trend of outmigration among youths, who tend to engage in a particular economic activity as a stop-gap measures to sustain livelihoods while in Nepal, and then immediately leave for work or study abroad once opportunity arises. 

Most of the workers are in low productivity, low skilled occupations such as agriculture, forestry and fishery (50.1%) and elementary workers (23%). 

Of the 9.0 million people who did not do any economic work, 46.9% said it was because they were student, 21.9% due to household chores, and 11% due to old age.

Census versus Nepal Labor Force Survey (NLFS) III: These may be different from the estimates in NLFS III, which estimated population at 29 million in 2018 itself. The working age population was estimated at 20.7 million (around 71% of the estimated population). Among the 20.7 million people of working age, 12.7 million were not in the labor force (61.3%). About 8 million people were in the labor force (7.1 million employed and 0.9 million unemployed). The labor force consists of individuals who are employed and those that are considered unemployed. The unemployment rate was estimated to be 11.4%. 

On sectoral employment, NLFS III showed agricultural, industrial and services has 21.5%, 30.8% and 47.4% employment share. Compared to the census 2021 data, the share of employment in agriculture is lower, industry and services higher. It may be because the definition of employment is narrower in NLFS III— the new definition of employment includes only work performed for others for pay or profit, i.e., production for own final use is not considered as employment.

Labor productivity

Let us compare labor productivity (real GDP in census year/number of people who performed any economic activity as recorded in the census) at constant FY2011 prices. 

Overall labor productivity barely increased between 2011 and 2021. It was NRs157,028 in 2011 and NRs159,832 in 2021. Between 2011 and 2021, labor productivity growth in all sectors (agriculture, industry, and services) was negative. 

At the disaggregated economic activity level, labor productivity was positive in mining and quarrying; manufacturing; and public administration, defense, education, and health, etc.

Comparing labor productivity and share of employment, we see that labor productivity in wholesale and retail trade has reduced but its share in employment and GDP has increased. Manufacturing’s share in employment and GDP has decreased, but labor productivity has increased. Construction’s share in employment and GDP has increased but labor productivity has decreased. Finance, insurance, and real estate activities share in employment and GDP has decreased, but labor productivity has increased. In fact, within it as well, it is real estate business activities, and professional and technical activities that are driving this activity’s high labor productivity.

Nepal's top remittance source countries in 2021

The KNOMAD/World Bank released new estimates of bilateral remittance flows for 2021. The top remittance corridors were: United States – Mexico: $52 billion; United Arab Emirates- India: $20 billion; Unites States – India: $6 billion; and Saudi Arabia – India: $13 billion. Note that these are not actual inflows, but estimates based on inward remittances to a country being allocated to various source countries in proportion to its stock of migrants in those countries, the per capita income (in purchasing power parity terms) in the destination countries, and the per capita income (again in PPP terms) in the origin countries.

Low- and middle-income countries (LMICs) (“Global South”) received about 56% of their remittances from high-income OECD (“Global North”), 27% from the GCC and other high-income countries (outside the OECD), and about 17% from the other LMICs. Interestingly, low-income countries received a larger share of remittances from the LMICs (including 15% from other LICs) than from the high-income countries. 

Some caveats regarding the estimates:  Informal inflows of both remittance income and migrant flows are not accounted for. Estimates may also be affected due to miscalculation of trade and tourism receipts as remittances, and vice versa; wrong attribution of the source of remittance to countries where the financial intermediaries (correspondent banks) have headquarters; and ban on outward remittance flows by countries. 

So, what were Nepal's top remittance source countries in 2021? According to the estimates, of the total $8.2 billion remittance inflows, Saudi Arabia accounted for 20.6%, Malaysia 20.5%, India 19.3%, Qatar 13.4% and United States 8.3%. The chart below shows remittances inflows to Nepal from 44 countries.

The chart below shows remittance inflows and stock of migrants. The stock of migrants in 2021 was estimated at 2.7 million. 

Meanwhile, the top remittance source countries have not changed much in the last decade. Korea, UAE and Kuwait have become important destination lately. Saudi Arabia and Malaysia have become prominent destinations for Nepali migrants. India has always been an important destination for employment, education, healthcare, etc.

The data also includes information on remittances from Nepal to other countries. It is estimated that $1.7 billion was sent from Nepal to India ($1.6 billion, which is close to remittance inflows from India), China ($82 million), Bhutan ($25 million), Pakistan ($1 million), and Bangladesh ($1 million). 

The chart below shows the stock of migrants and remittance inflows in 2021.

Note that the remittance inflows estimate by Nepal Rastra Bank (central bank) might differ. In FY2018, it estimated that 22.8% of total remittance inflows was from the USA, 13.4% from Saudi Arabia, 11.6% from Qatar, 10.1% from UAE and 10% from Japan.

Reintegration of returning migrant workers

It was published in Pandemic Borders, Open Democracy, 16 March 2021.

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As COVID brings migrants home, how can Nepal reintegrate returning workers?

Money from overseas makes up a quarter of GDP, and the effects of the pandemic are putting a squeeze on an already struggling economy

For Nepal, like other developing countries that depend on migrant remittances, the COVID-19 pandemic has dealt a severe blow.

Money sent home by the thousands of Nepali migrant workers abroad amounts to about 25% of the country’s GDP, making it one of the most dependent countries on remittances in the world.

Reverse migration since the spread of COVID-19 has compounded unemployment problems in an already lockdown-battered economy. This means that timely and meaningful reintegration of the returning migrant workforce should be one of the top priorities, especially given that international travel and the global economy are not projected to fully recover any time soon.

Reverse migration

Since the lockdown started in March 2020, there has been a steady inflow of migrant workers returning to their home countries. Nepali migrant workers in India travelled by road, often walking for days to reach the border. Those in other countries were repatriated on special chartered flights operated by the government.

There is no official data on the exact number of migrant workers who have returned to Nepal since the lockdown, but in May the Nepal Association of Foreign Employment Agencies estimated that over half a million migrant workers wanted to return, especially from the Middle East and Malaysia.

The Nepali economy is facing a potential slowdown in remittance inflows. And while a 2018 labour force survey estimated unemployment at 11.4%, a more realistic number based on a broader measure of labour under-utilisation puts it as high as 39.3%. Amid a slowing economy, an influx of returning migrant workers will exacerbate unemployment even further.

Remittances have supported household consumption, propped up government finances (as revenue from imports financed by remittances alone account for 45% of total tax revenue), boosted banking sector liquidity and credit growth, increased household spending on healthcare and education, and helped to maintain external sector stability despite a ballooning trade deficit. All this means that the country will face a tough time reintegrating returning workers.

Reintegration

With the healthcare crisis requiring more public spending just to provide emergency relief, this severely curtails the country’s ability to effectively fund reintegration of returning migrant workers. The government estimated that it would need about $1bn just for employment programmes to deal with the impact of COVID-19.

A large gap between expenditure and revenue means that Nepal will need more international support to boost social protection-related spending in the next few years. Internally, it will have to reduce wasteful spending such as funding of pet projects, bailing out consistently underperforming state-owned enterprises, and non-targeted subsidies.

To enhance governance and targeting, it may be useful to use digital platforms to identify eligible beneficiaries of various government programmes and possibly transfer any cash handout directly to their bank accounts.

Another way to support returning migrants is to provide them with access to affordable credit to help those who are willing to start their own business ventures

In fact, there already exists social protection and public workfare programmes that can be better utilised to quickly engage returning migrant workers at the local level. For example, the Prime Minister Employment Program, which guarantees a maximum of 100 days of employment at subsistence wage, has been severely under-utilised so far. From July 2020, until March 3 this year, it provided an average of six days of work for 25,852 people out of 743,512 listed unemployed people in its roster.

The programme was launched in early 2019 to reduce youth dependency on overseas jobs and to create job opportunities within the country itself. Ramping up this programme with adequate budgeting and targeting could be beneficial in the short term to employ returning migrant workers.

Unfortunately, a fallout of the ineffectiveness of this programme was that many migrant workers who returned home are again actively pursuing job opportunities overseas. For instance, by September 2020, there were long queues of migrant workers at the Indian border points waiting for an opportunity to enter India for employment.

Technical and vocational education and certification could be another option for reintegrating migrants who are willing to enhance their skills and perhaps change profession. This could be done in partnership between government and businesses.

Another way to support returning migrants is to provide them with access to affordable credit to help those who are willing to start their own business ventures. Programmes such as Youth and Small Entrepreneurs Self-Employment Fund are set up to subsidise interest on loans for self-employment, and could be used for this.

The fund has not been as effective as expected largely owing to politicisation, a high interest burden even after subsidy, and approval hassles. Since its launch a decade ago, there are just 72,789 recipients, including 6,500 between July 2019 and July 2020. The central bank has also launched a scheme to issue subsidised loans at 5% interest to returnee migrant workers, among others. However, the uptake has been slow.

Successful reintegration would not be possible without accelerated economic growth as domestic employment opportunities will remain constrained, contributing to the “push factor” for outmigration which compel folks to migrate overseas for employment and safety.

Short-term economic stabilisation measures followed by structural reforms to ensure sustained and inclusive economic growth are required. In this process, more digitalisation, better targeting and, most importantly, sound governance will be vital.

Remittances and external sector stability in Nepal

It was published in The Kathmandu Post, 02 September 2020. Related Twitter thread with charts here. 

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The cash cow is drying up

Don’t be fooled by the better-than-expected results from the external sector, the effects are only temporary.

The latest provisional data for the fiscal year 2019-20 released by the Nepal Rastra Bank provide interesting insights on the impact of Covid-19 and the subsequent lockdowns on the economy. Almost all areas, except for the external sector, have been hit hard since the first lockdown began in late March. Specifically, unlike projections of a sharp drop, the data shows just a small deceleration in remittances.

This has led some to argue that Nepal’s external sector is sound as well as resilient and that vulnerabilities are on the downside. However, the reality is that it only appears sound owing to a larger import contraction than export contraction, and slower than expected deceleration of remittances. Remittances are an important household coping strategy when faced with an adverse income or consumption shock. Migrant workers tend to use precautionary savings to remit more after such shocks. This should not be construed as a sign of resilience.

Still unstable

A sudden supplies disruption was expected to hit imports and remittances, resulting in an improvement in the current account balance, which is a record of Nepal’s transactions with the rest of the world. Exports pretty much stalled after the pandemic spread globally. Imports, except for medical equipment and supplies, were also severely curtailed due to disruptions and logistical hurdles. Further, oil imports, which normally account for 15 percent of the total import bill, decreased on account of a drop in internal demand, particularly for transportation and development projects.

Declining global oil prices also contributed to a lower oil import bill. Consequently, imports decreased much faster than exports. For instance, in US dollar terms, merchandise exports and imports contracted by 7.9 percent and 18.9 percent, respectively. In a reversal of the previous trend, merchandise trade deficit actually dropped to 28.2 percent of the gross domestic product in 2019-20 from 37.1 percent of GDP in 2018/19.

Similarly, the trade imbalance in services also improved as services import (which includes outbound travel and foreign educational expenses) decreased much more than services export (which includes inbound travel and tourism). A sharp contraction of imports but a small contraction of remittances (by just 3.4 percent) improved the current account balance. This is what the analysts meant when they argued that the external sector remained stable despite the adverse external environment.

Meanwhile, the balance of payments reached a record $2.4 billion as a large contraction of imports but a lower than expected deceleration of remittances and an increase in foreign direct investment and foreign emergency loans all played crucial roles. Similarly, gross foreign exchange reserves have also hit record levels. The Nepali rupee depreciated by 9.2 percent against the US dollar at the end of 2019-20.

The improvement in the current account balance, a large balance of payments surplus and record foreign exchange reserves might have given a misplaced assurance that all is sound and stable. But regardless of the pandemic being contained or the country choosing to simply live with the virus, as the economy opens up after the lockdowns and supply chains are restored, the situation might quickly change.

Most prominently, the import of commodities (oil, food and raw materials) as well as intermediate capital goods will increase. Meanwhile, given the lack of price competitiveness, an unfavourable policy environment, distortionary incentives and generally subdued external demand, exports will likely not recover soon. Travel and tourism activities may not also recover quickly. These will deteriorate the tenuous external sector stability and put a strain on foreign exchange reserves.

A short respite

The problem will be compounded by the expected deceleration of remittance inflows. Apart from its positive effect on reducing poverty and boosting consumer demand, government revenue and financial sector liquidity, large remittance inflows have been a saving grace for external sector stability in the face of a large and growing trade deficit. The number of Nepali migrant workers has been continuously declining since 2014-15. The persistent deceleration of remittances will be coupled with a smaller expatriate workforce, with fewer outbound migrant workers and a reduction in the work hours of those already working abroad.

There are three main reasons why remittances did not decelerate as expected in 2019-20. First, remittances tend to increase immediately after a shock in receiving countries. For instance, remittances increased by 12.2 percent in 2014-15 as migrant workers, drawing from their precautionary savings, remitted more income to their earthquake-affected families. However, the following fiscal it only grew by 0.8 percent. Second, the depreciation of the Nepali rupee against the US dollar also provides an incentive for migrant workers to remit more money. The rupee depreciated by 9.2 percent in mid-July 2020, much higher than 0.02 percent depreciation in mid-July 2019. Third, the use of formal banking channels to remit income has increased along with the rise in the number of money transfer agencies and the crackdown on informal inflows.

The Nepali economy entered the Covid-19 era with pre-existing weaknesses: a weak foundation for meaningful structural transformation, volatile GDP growth and inflation, mounting fiscal stress due to a large fiscal deficit and increasing public debt, persistent asset-liability mismatches and high credit growth by financial institutions, and decelerating remittances. It was exacerbated by weak governance and contract management in public projects, political infighting within the ruling party, over-politicisation of the Millennium Challenge Corporation’s compact programme and geopolitical discord. The potential deceleration of remittances will exacerbate these trends, and heighten external sector stress.

The impact of COVID-19 on Africa

Paul Collier explains how four shocks (drop in commodity prices, remittances, tourism, and international capital) due to the overarching COVID-19 shock are threatening Africa's progress.

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Two in three jobs in sub-Saharan Africa are in the informal sector. There are no economies of scale or specialisation. Small is not beautiful, it is unproductive. Africa needs more companies capable of organising a workforce into specialised, collaborative teams, disciplined by competition. Yet even the firms that Africa has are bleeding from the economic impact of coronavirus.

This shock is not predominantly a result of Africa’s health crisis. The causes are the sharp downturns in advanced economies. Commodity prices have dropped and Africa is a major net exporter.

Senegal and Ethiopia are major recipients of remittances from citizens working abroad. Normally, these rise during a domestic crisis, but in this global emergency Africa’s diaspora are losing their jobs. This also hits the most desperate places such as Yemen.

Finally, the retreat of international capital to safety is hitting hardest the countries that were most promising for investors. Ghana was attracting US pension fund money and major companies such as Volkswagen and Bosch. All four shocks are eroding Africa’s scarce organisational capital and are likely to persist for the medium term.

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Impact of COVID-19 on the external sector

The IMF’s latest external sector report highlights the state current account balance amidst the global trade and supplies disruptions caused by the COVID-19 pandemic. The pandemic has sharply curtailed global trade, lowered commodity prices, and tightened external financing conditions. 

According to the report, the world had a current account surplus of about 2.9% of world GDP in 2019. About 40% of current account surpluses and deficits were excessive in 2019. Euro area had larger-than-warranted current account balances, but the US, the UK and Canada had lower-than-warranted current account balances. China’s external position remained unchanged and they were broadly in line with fundamentals and desirable policies. Currency movements were generally modest, but with preexisting vulnerabilities/fundamentals in EMDEs (large current account deficits, a high share of foreign currency debt, and limited international reserves or reserves adequacy). 

The IMF forecasts current account surplus narrowing by 0.3% of world GDP in 2020, thanks to large fiscal expansion but offsetting increases in private savings and lower investment (precautionary move by household and business sectors). Economies dependent on severely affected sectors such as oil and tourism, and remittances have been hit hard.  There was a sudden capital flow reversal and currency depreciations in EMDEs as financial market sentiment deteriorated during the initial days of the crisis. Unsurprisingly, global reserve currencies appreciated as investors looked for safe haven amidst the financial stress. There is some unwinding now though, reflecting exceptional monetary and fiscal policy support. 

Current account balances in 2020 will be affected by 

• Contraction in economic activity (lower output/export and import demand)
• Tightening in global financial conditions
• Lower commodity prices (oil, metals, food, raw materials)
• Contraction in tourism
• Decline in remittances 

The number of export restrictions in 2020 is higher than during the global financial crisis, but the number of import restrictions is lower. Sectors such as pharmaceutical and medical supplies, made-up textile articles, wearing apparel, rubber products, and ethyl alcohol and spirituous beverages faced the most export restrictions.  

Some EMDEs with preexisting vulnerabilities (large current account deficits, a high share of foreign currency debt, and limited international reserves) might face high risk of an external crisis (with capital flow reversals and currency pressures) if risk sentiment deteriorates. 

A second wave of the pandemic could lead to tightening of global financial conditions, narrow the scope of EMDEs to run current account deficit, further reduce current account balances of commodity exporters, and deepen the decline in global trade. Up to now, swift response of central banks (policy rate cuts, liquidity support, asset purchase programs, and swap lines offered by the US Federal Reserve) and expansionary fiscal policy have contributed to an easing in global financial conditions. EMDEs experienced sudden capital flow reversals in late February and march but then stabilized in most cases with even modest inflows in selected economies. 

Near-term priority

The near-term priority should be to provide relief and promote economic recovery. 

• Flexible exchange rates should be allowed to adjust as needed to absorb external shocks (especially a fall in commodity prices or tourism). 
• Official financing to ensure continued healthcare spending is required for those economies experiencing disruptive balance of payments pressures and without access to private external financing. 
• Tariff and non-tariff barriers to trade, especially on medical equipment and supplies, should be avoided. 
• Countries with adequate forex reserves could engage in exchange rate intervention to avoid disorderly market conditions and limit financial stress. 
• Countries with limited reserves and facing reversals of external financing, capital outflows management measures could be useful (but these should be used to substitute the warranted macroeconomic and structural policy actions).

Medium-term priorities

Preexisting economic and policy distortions may persist or worsen over the medium-term.

• Fiscal consolidation over the medium term would promote debt sustainability, reduce current account gap, and facilitate raising international reserves. Note that excess current account deficits in 2019 partly reflected larger-than-desirable fiscal deficits. 
• Productivity-enhancing reforms would benefit economies with low export competitiveness. 
• For countries with large current account surpluses after the COVID-19 pandemic, prioritizing reforms to encourage investment and discourage excessive private savings are warranted. In some instances, economies with large current account surpluses could discourage excessive precautionary savings by expanding the social safety nets. 
• For economies with some fiscal space, emphasis on greater public sector investment would be helpful to narrow excess surpluses and to stimulate economic activities. 

Outlook for 2021

The outlook for 2021 is highly uncertain. Under a scenario where a second major global outbreak occurs in early 2021 (disruptions to economic activity is assumed to be half the size of the baseline in 2020, financing tightening of about one-half of the increase in sovereign and corporate spreads since the outbreak began in EMDEs, and relatively limited tightening of sovereign premiums for advanced economies),

• Global trade is projected to decline by an addition 6%, global GDP decline by 5%, and oil prices to be higher by 12% compared to the baseline. 
• Recovery in global trade will be underpinned by the need to rebuild the capital stock (investment goes up), and higher import intensity of exports. 
• Emerging market economies will face higher borrowing costs, lower oil prices and subdued domestic demand – it will raise current account balances toward surplus. 
• Net oil exporters will face lower oil prices, which will reduce their current account balances.
• Advanced economies will face relatively limited tightening in external financing conditions and greater fiscal policy space will mean lesser import compression than among EMs, leading to lower current account balances. 
• So, capital will flow from EMs to AEs, highlighting the unequal impact of the crisis and the need for a global policy response. 
• Under a faster recovery scenario, global trade rises by 4% in 2021 compared to the baseline. 

The report notes that the historical relationship between trade and the components of GDP/aggregate demand (or import-intensity-adjusted measure of aggregate demand, which basically is a weighted average of aggregate demand components in which the weights are the import content of each component computed from national accounts input-output tables) fully explains the expected global decline in trade of goods. A part of the impact of lower economic activity on trade is felt through global value chains. After the global finance crisis circa 2009, residual factors such as rising protectionism explained part of the fall in trade in goods and services as they could not be fully explained by the fall in economic activity alone. Services trade contraction in 2020 is more severe than what could be expected based on the historical relationship between services trade and aggregate demand, suggesting the role of special factors such as travel restrictions. 

The IMF determines excessive current account balances by comparing the actual current account (stripped of cyclical and temporary factors) and the current account balance that is consistent with fundamentals and desirable policies. The resultant gap reflects policy distortions (e.g., higher current account balance than implied by fundamentals and desirable policies correspond to a positive current account gap, whose elimination is desirable over the medium-term). The IMF also considers REER that is normally consistent with the assessed current account gap. A positive REER implies an overvalued exchange rate. Other indicators that are considered are financial account balances, international investment position, reserve adequacy, and other competitiveness measures such as the unit-labor-cost-based REER and staff views on the current account gap using country-specific trade elasticities. 

On economic and financial fundamentals, and desired policies, advanced economies with higher incomes, older population, and lower growth prospects have positive current account norms. EMDEs tend to have negative current account norms because they are expected to import capital to invest and exploit their higher growth potential.

Impact of lockdown on employment, remittances and food security in Nepal

Measuring the human cost of lockdown in Nepal

Mushfiq Mobarak, Bishal Chalise and Corey Vernot write in Nepali Times:  

One of us (Mobarak) has been leading a team collecting large-sample data on the rural poor across 90 villages in Kailali and Kanchanpur to track labour mobility, wages, remittances, food security, and mental health before and after the lockdown. We collected five rounds of data from 2,600 households in monthly intervals since September 2019, and conducted the most recent round of phone surveys in April, 2020 immediately after the lockdown measures were enforced.

[...]Total hours in income-generating (wage or non-farm business) work for prime-age males have decreased 75% since January. Men are spending a bit more of that time on their own farm, but even accounting for that, total work hours are significantly below even the pre-harvest lean season in October. [...]The lockdown has had even larger effects on migrant families, because there has been a 61% dip in the remittance receipts since lockdown. A large part of this is because migrants who would normally be away, earning income elsewhere, were forced to return home; 65% of the migrants who were in either India or other cities in Nepal during 1 January – 1 April 2020 returned home in a rush during the first two weeks of April. Further, individual migrants who are still away are only able to send half of what they used to send before the lockdown. [...]Some 65% of our respondents worried about having enough food in the house when we spoke to them in late April. As a benchmark, that number was 67% in September-October 2019 (during the pre-harvest lean season), and 43% in January after the rice harvest. 

[..]In an experiment, when we provided some of these poor, rural, migrant-dependent households loans during the pre-harvest lean season in 2019, they invested a large portion of that money buying fertiliser. Agricultural investment was significantly higher than those who did not receive such loans.

Covid-19: Impact and response

It was published in The Kathmandu Post, 03 May 2020.

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Covid-19: Impact and response

The strict lockdown to contain the spread of SARS-CoV-2 and supplies disruptions are wreaking havoc on the economy. It is going to push many vulnerable households below the absolute poverty line and will likely increase inequality. According to the latest projections, gross domestic product growth will fall sharply to 2.3 percent in the fiscal year 2019-20, much lower than the 7.1 percent last fiscal and the government’s pre-Covid-19 target of 8.5 percent.

A sudden lockdown, coupled with the lack of contingency plans to smoothen consumption, supplies and housing, has inflicted appalling hardships on migrant workers and the poor and vulnerable. Similarly, businesses are facing financial stress or are outright bankrupt. The economy urgently needs a fiscal relief package for the vulnerable population and micro, small and medium enterprises (MSMEs), followed by a recovery package after the spread of Covid-19 is largely contained. However, effective last-mile delivery—that actually reaches the intended beneficiary households and businesses—is a huge challenge due to weak accountability and targeting mechanisms.

Economic impact

During the lockdown, over 90 percent of economic activities have come to a grinding halt. The latest projections show that the agricultural, industrial and services sectors are projected to grow by 2.6 percent, 3.2 percent and 2 percent, respectively. These numbers are drastically lower than the growth these sectors experienced last fiscal year.

The economy was already weak before the lockdown and social distancing measures were implemented. For instance, a delayed monsoon, shortage of fertilisers, use of substandard seeds and an armyworm invasion dented agricultural output before the Covid-19 pandemic. The pandemic exacerbated the situation through agricultural inputs crunch (such as workers and fertilisers), especially to harvest winter crops, connect to agricultural markets, and prepare for summer crops.

Similarly, weak capital spending and the lack of an investment-friendly environment affected industrial output before the pandemic. The Covid-19 outbreak in Nepal happened to exacerbate the situation as it hit in the second half of the fiscal year—the period when a majority of economic activities occur. No wonder, mining and quarrying, manufacturing and construction activities are expected to contract in the current fiscal year. Work from home norms do not apply to these activities and productivity losses will continue to linger for some quarters.

Within the services sector, a deceleration of remittance income and decline in imports were already affecting retail and wholesale trade, which has the second-largest share in the GDP. After the pandemic, this sub-sector is expected to grow by just 2.1 percent, down from 11.1 percent last fiscal. Travel and tourism-related activities such as hotels and restaurants, and transport, storage and communications are expected to contract. Other services activities that are badly hit are financial intermediation, real estate and business activities, and education. Note that casual workers and informal sector firms, mostly MSMEs, are concentrated in the services sector.

Overall, consumption has been subdued, and fixed public and private investments are contracting. The government’s 2.3 percent growth estimate for the fiscal year might itself be a bit optimistic because it assumes that the affected economic activities, except for international tourism-related activities, will start to pick up pace from mid-May. But this is highly unlikely, owing to the uncertainties over Covid-19 contagion, unfavourable external factors (decline in remittances and foreign direct investment), difficulty to quickly reverse the dispersal of workers, and supply disruptions.

This crisis will increase the fiscal deficit because of lower than expected revenue mobilisation and nominal GDP growth, and higher than expected expenditure needs. Inflation may rise, but not to the extent seen during previous crises as depressed consumer demand will somewhat counteract cost-push inflationary pressures arising from a shortage of goods and services. Similarly, a decline in exports as well as imports, and deceleration of remittance inflows might have a net effect of reducing the current account deficit. However, foreign exchange reserves will fall. This is not good, as it jeopardises external sector stability.

Importantly, since a large proportion of the households are clustered just above the absolute poverty line, an income shock due to the Covid-19 will push many of them below the poverty line. It will also potentially widen inequality because the poorest households are disproportionately affected. Note that over 62 percent of the employed workforce is in the informal sector and about 85 percent of them are employed informally—that is, those who do not have paid annual leave or sick leave benefits and whose employers do not contribute to their social security. Social protection problems, as well as unemployment, are going to exacerbate as mass internal layoffs and returning migrant workers increase in the coming weeks. The unemployment rate was already over 11.4 percent and the labour underutilisation rate, which includes unemployed, time-related unemployed and potential labour force, was even higher at 39.3 percent.

Crisis response

Given the enormity of the emerging health, social and economic problems, a well-coordinated and synchronised relief and recovery package is of urgent need. Extraordinary circumstances require exceptional measures, but the government’s economic response has been ordinary at best.

A detailed relief and recovery package is missing. The immediate-term focus should be to stabilise aggregate demand and to lower the burden on workers due to unemployment and income shock. These are best done through the expansion of social protection measures and easing regulatory as well as liquidity constraints faced by MSMEs. After Covid-19 pandemic subsides and is largely contained, a full economic recovery package is required to help struggling businesses and workers. This is also a time to think of import-substituting production and the diversification of sources of economic growth and poverty reduction.

Further, although the fiscal space is already tight, thanks to expansionary redistributive budgets in the previous years, there should be no confusion about financing Covid-19 related measures by tweaking expenditure allocation. Of course, revenue mobilisation will be lower than projected and so will be spending. But, a repurposing of the recurrent budget (especially those allocated to use of goods and services) and capital budget (allocated for vehicle purchase, consultancy, land acquisition and some civil works) is still possible. The government can issue bills and bonds as planned and raise the required money for immediate needs.

It can be used to expand unemployment and other social security-based direct cash transfers, boost healthcare spending, provide relief to farmers, subsidise food and daily essentials, guarantee credit on additional working capital for MSMEs, subsidise employee retention, cover the short-term interest on loans taken by MSMEs, expand insurance coverage, and pay premium perks for frontline workers, among others. Similarly, the government can use funds related to social security, foreign employment welfare, constituency development, and prime minister employment scheme. It could also use funds lying idle at various autonomous authorities. These measures do not necessarily jeopardise fiscal sustainability.

Moreover, the government can request the Asian Development Bank and the World Bank—the largest multilateral lenders to Nepal—to repurpose existing assistance towards the government’s new immediate and medium-term priorities. It can also seek additional concessional loans, given the enormity of the crisis and the fiscal burden in the next few years. Multilateral lenders have rapid disbursement facilities for emergency assistance and policy-based loans for budget support to help the government’s agenda.

Finally, the government could issue a pandemic bond and request the central bank to purchase it under a special one-off mechanism. For instance, the central bank can repurchase government bonds from the market and return the funds to the government’s account when they are due. Or it can perpetually roll it over.

CBS projects Nepal's GDP to grow at 2.3% in FY2020

On 29 April, Central Bureau of Statistics (CBS) estimated that Nepal’s economy (at basic prices) will likely grow at 2.3% in FY2020, down from 6.7% revised estimate for FY2019. The projected growth rate is lower than the government’s 8.5% target. The growth estimates by CBS is based on the assumption that the COVID-19 affected economic activities will start to pick up pack from mid-May (last quarter) except for tourism activities (hotels & restaurants, and international travel). 

In FY2020, the growth is largely driven by electricity, gas and water output. This might be based on the expectation that the government will be able to bring online Upper Tamakoshi and few other hydropower projects by mid-July as a few large infrastructure projects are not severely affected by COVID-19 pandemic related disruption to labor, supplies and capital.

Overall, agricultural, industrial and services sectors are projected to grow by 2.6%, 3.2% and 2%, respectively. Agricultural sector contributed 0.8 percentage points, industrial sector 0.5 percentage points and services sector 1.07 percentage points to the overall projected GDP growth of 2.3%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May (expect for international tourism). 

Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (28.7%, up from 9.1% in FY2019), followed by fishing (7.2%, up from 5.6% in FY2019), health and social work (7.1%, up from 6.8% in FY2019), and public administration and defense  (6.9, up from 5.5% in FY2019). All other economic activities are expected to grow at a rate lower than in FY2019. Construction; mining & quarrying; manufacturing; transport, storage & communications; and hotels and restaurants activities are expected to contract in FY2020. 

Industrial output would have contracted if it were not for the high growth projection for electricity and water sub-sector's output. Delayed monsoon, slow capital spending and lack of business confidence amidst the lower-than-expectation performance of the government had already created an environment where GDP growth was projected to be lower than in FY2019. The strict lockdowns and social distancing rules to contain the spread of COVID-19 exacerbated the slump in economic activities. 

Agricultural output is projected to grow at 2.6%, down from 5.1% in FY2019, largely due to a delayed monsoon, shortage of fertilizers, use of substandard seeds and an armyworm invasion. The labor, harvest and supplies disruptions due to COVID-19 exacerbated the situation. The CBS expects wheat and vegetables output to grow despite the effect of COVID-19 on agricultural market and supply chains. 

Industrial output is projected to grow at 3.2%, down from 7.7% in FY2019. Within industrial sector, electricity, gas and water subsector is expected to grow at the fastest rate: 28.7%, up from 9.1% in FY2019. The CBS expects a substantial addition of hydroelectricity to the national grid by mid-July. All other industrial sector activities are expected to contract. Mining and quarrying activities are projected to grow by -0.7%, down from 8.9% in FY2019, as mining and quarrying of stones, sand, soil and concrete is affected by the lockdowns and social distancing rules. Similarly, Construction activities are projected to contract by 0.3%, down from 8.1% growth in FY2019 as a combination of slow capital spending and the strict lockdowns affected output.  Manufacturing activities are projected to contract by 2.3%, down from 6.8% growth in FY2019. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from a lack of private sector investment as well as loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to drastically boost manufacturing output as expected. 

Services output is projected to grow at 2%, sharply down from 7.3% in FY2019, making it the most affected sector due to the lockdowns and supplies disruptions. Within service sector, wholesale and retail trade activities are expected to grow by 2.1%, down from 11.1% in FY2019. This reflects a drastic drop in import demand (as remittance-financed imported goods are traded in the domestic market) and sale of agricultural and industrial goods. Since travel and tourism activities were severely affected by COVID-19 pandemic, hotels and restaurants sub-sector is expected to contract by 16.3% and transport, storage and communications by 2.4%. The growth rates in FY2019 were 7.3% and 5.9%, respectively.  Financial intermediation is projected to grow by 5.1%, lower than 6.2% in FY2019, reflecting reduced income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to slowdown to 3.3% from 6.1% in FY2019. Education sector is expected to slowdown to 3.0% from 5.1% in FY2019. Public administration and defense is expected to grow at 6.9%, up from 5.5% in FY2019. Similarly, health and social work is expected to growth at 7.1% from 5.7% in FY2019. 

On the expenditure side, GDP (at market prices) is expected to grow at 2.3%, drastically down from 7% in FY2019. Consumption is expected grow at 3.2%, down from 5% in FY2019. However, public and private gross fixed investment and inventory (change in stock) are expected to contract. Net exports is expected to growth at 5.5% (compared to a negative growth rate last fiscal) thanks to a higher rate of decrease in imports compared to exports. 

Here are quick takeaways from the latest GDP projection.

First, the strict lockdowns, supplies and travel disruptions, and social distancing norms have severely affected almost all sectors. Particularly hit are industrial and services sector activities. Overall, consumption slowed down but investment (both public and private) contracted.

Second, GDP growth was projected to be lower than in FY2019 even before COVID-19 pandemic affected Nepal. Delayed monsoon and shortage of inputs had dented prospects for higher agricultural output. Slower than expected capital spending during the first half of FY2020 had affected construction, and mining and quarrying. Industrial sector was in stress due to low capital utilization. Slowdown in remittance inflows had affected services sector activities (particularly, import dependent wholesale and retail trading). The COVID-19 onslaught exacerbated the economic outlook. 

Third, the CBS’s projection might be a bit more optimistic. A majority of the economic activities happen in the second half of fiscal year. This is also the period when COVID-19 hit Nepal and the government resorted to necessary containment measures like strict lockdowns and social distancing. The CBS expects lockdowns to loosen by mid-May and economic activities to gradually normalize. However, this may be challenging because of the disruption to labor and supplies markets and subdued consumer demand. For instance, the dispersal of labor (internal and external migrant workers) is hard to reverse quickly. Contagion conscious businesses may find it hard to fully open shops and activities. Same with casual workers and informal sector workers. It will be challenging to ramp up construction activities for the rest of the year because contract award and work commencement usually happened in the second half. Additionally, if hydroelectricity generation (addition to the national grid) is less than expected by mid-July, then it will affect the growth projections too. 

Fourth, fiscal stress will be heightened as revenue dwindle but expenditure needs shoot up. Employment demand under prime minister employment fund will increase as jobless people resort to making use of social protection schemes (think of it as automatic stabilizer in employment market). Similarly, there will be increased pressure for direct cash transfer to the newly jobless workers and vulnerable groups.

Fifth, with adverse external environment (weak export demand, slowdown in Indian economy, likely fall in remittances and FDI, etc), and weakened internal production, GDP growth in FY2021 might still be muted. Private sector investment may remain subdued given the large uncertainties and additional cost to businesses due to the lockdowns. Worse, some might simply go out of business and default on loan payments. In times like this the public sector really has to ramp up consumption (direct cash and in-kind transfers, support to MSMEs) and investment (high capital spending exploiting the low hanging fruits) to stabilize falling aggregate demand.