Key highlights of Nepal's 15th five-year plan (FY2020-FY2024)

National Planning Commission recently published the 15th five-year plan (FY2020-FY2024) taking also into account the effect of COVID-19 pandemic on the government’s priorities and the economy. This plan is considered as a first phase of a 25-year long-term economic vision that aims to position Nepal as a high-income country with per capita income of USD 12,100 by FY2044.  Its theme is 'generating prosperity and happiness' and aims to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth. 

The government is expecting Nepal to graduate from LDC category to a developing country status within this plan (by 2022 with per capita income of USD 1,400). This plan is expected to contribute to efforts to ensure that Nepal reaches a middle-income country status by FY2030 (with per capita income of USD 2,900) and achieve the SDGs as well. By the end of FY2024, per capita income is estimated to reach USD 1,595.

The plan emphasizes boosting investment in the sectors or thematic issues that are considered as drivers of economic transformation. These include transport, ICT, energy, education and healthcare, tourism, commercialization of agriculture and forest products, urbanization, social protection, subnational economy, and good governance, among others.

 By FY2024, the government wants to achieve a double-digit growth rate, increase per capita income of USD 1,595, reduce population under absolute poverty line to 9.5%, and increase share of formal sector employment to 50%. 

Some of the major national targets for 15th five-year plan (FY2020-FY2024) are as follows:

• Average GDP growth (at basic prices): 9.6%
• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15.7%
• Share of essential goods (agri, livestock, food items) in total imports: 5%
• Population under the absolute poverty line: 9.5%
• Population with multidimensional poverty: 11.5%
• Share of formal sector employment: 50%
• Unregistered (formal) establishment: 10% of total establishment
• Literacy rate (15+ years): 95%
• Road density: 0.74 km of road per sq km of land
• Households with access to electricity: 95%
• Population with access to internet: 80%
• Electricity generation (installed capacity): 5,820 MW
• Renewable energy: 12% of total energy consumption
• Per capita electricity consumption: 700 kwh
• Agricultural productivity (major crops): 4 MT per hectare
• Irrigable land with year-round access to irrigation: 50%
• Per capita tourist spending: USD 100 per day
• Human development index: 0.624
• Gender development index: 0.963
• Population covered by basic social security: 60%
• Social security expenditure: 13.7% of budget
• Global competitiveness index: 60
• Ease of doing business index: 68
• Travel and tourism competitiveness index: 3.8
• Corruption perception index: 98
• Nepali citizens with national ID card: 100%
• Population affected by disaster incidents: 9.8%

The NPC estimated average growth in agriculture, industry, and services sectors to be 5.4%, 14.6%, and 9.9%, respectively. By the end of the 15th plan, the government is targeting to increase the share of industry and services sectors to 18.8% and 58.9%, respectively, while the share of agriculture sector is to decrease to 22.3%. To achieve the stated average growth rate, the NPC estimated that NRs 9.229 trillion (at FY2019 constant prices and based on ICOR of 4.9:1; FYI, a lower ICOR indicates efficient production process) investment will be required over the plan period. Public, private and cooperative sectors are expected to contribute 39%, 55.6%, and 5.4%, respectively of this required investment.  

[The government is considering FY2019 as a base year for the long-term economic vision. So, the data is presented in FY2019 constant prices. However, this is not much helpful in doing comparative analysis including that of long-term plans and targets. National account estimates, public finance, and periodic surveys - based on which the numbers are estimated eventually- are either presented with different year as base year (FY2011 for NEA for now) or are in current prices (fiscal, monetary, external sectors, and household surveys.]

As a share of GDP by FY2024, the expected impact on macroeconomic indicators are as follows:

National accounts (focused on increasing investment through savings mobilization)

• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15%
• Gross domestic savings: 22%
• Gross national savings: 47.5%
• Gross fixed capital formation: 41.6%

Fiscal sector (focused on allocation and implementation efficiency, and fiscal discipline for expenditure management; maximize revenue mobilization and taxpayer-friendly tax administration)

• Total budget: 43.3%
• Recurrent expenditure: 17.9%
• Capital expenditure: 18.6%
• Financial management: 6.8%
• Revenue: 30%
• Income tax: 10%
• Foreign debt: 5.7%
• Domestic borrowing: 4.3%

Monetary and external sector (focused on controlling inflation, balance of payments stability, and financial stability)

• Average annual Inflation: 6%
• Export of goods and services: 15%
• Import of goods and services: 49%
• Remittances: 22.1%
• Foreign investment: 3%

Meanwhile, the average financing gap to achieve the SDGs is estimated to be NRs 585 billion per year for the entire period of 2016 to 2030 (SDG period). It is on average 8.8% of GDP for 2016-19, 12.3% of GDP for 2020-22, 13% of GDP for 2023-25, and 16.4% of GDP for 2026-30. The overall annual financing gap is estimated at 12.8% of GDP throughout the period of 2016 to 2030.

What induces inclusive growth?

In an article in VoxEU, Jalles and de Mello argue (related paper in Review of Development Economics) that episodes of inclusive growth are more likely to occur where human capital is high, tax-benefit systems are more redistributive, productivity grows more rapidly, and labor force participation is high. Trade openness and a range of institutional factors, including political system durability and electoral regimes, also matter. They define inclusive growth as increases in GDP per capita without a concomitant deterioration in the distribution of household disposable income.

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In fact, data from the World Bank World Development Indicators show that inclusive growth is not a rare event: between 1980 and 2013, there are 268 episodes of increases in GDP per capita without an associated deterioration in the distribution of household disposable income in the sample of up to 78 countries for which information is available. These episodes include, for instance, France between 1985 and 1989, Germany between 1995 and 1997, Brazil between 2004 and 2006, and India between 1998 and 2000. 

[…] In an average episode, real GDP per capita grows at about 3.3% per year, and the Gini coefficient of household disposable income falls by about 0.8 over the same period. While duration does not seem to have much influence on the magnitude of changes in real GDP per capita during inclusive growth episodes, the reduction in the Gini coefficient tends to be more pronounced in episodes that last four years or less.

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They argue that inclusive growth episodes are more likely to occur where:

• Population is better educated
• Tax-benefit systems are more redistributive
• Labor force participation and multifactor productivity growth are higher
• Economies are more open to trade 
• Share of population working in industry is higher
• Durable political systems exist with regular parliamentary elections and electoral regimes based on proportional representation (not exactly durability of governments per se though)
• Some degree of fiscal decentralization exists

But then, inclusive growth episodes are less likely where:

• Inflation is high
• Output growth is more volatile
• Unemployment is widespread
• Financial deepening is more (higher probability of banking and financial crises occurring)

So, redistribution through tax-benefit systems, human capital accumulation, and a sound macroeconomic framework seem to be important for inclusive growth. However, note that results may change slightly depending on the definition of inclusive economic growth. For instance, some define inclusive economic growth (prosperity) as the annualized growth in average real per capita consumption or income of the bottom 40 per cent. Others define it as rapid and sustained economic growth, access to education and health opportunities, and social protection. 

Macro-criticality of social spending

Social spending plays a vital role in people’s lives, especially those of vulnerable, marginalized, and elderly. It an important part of inclusive economic growth and poverty alleviation strategy. It promotes financial security (to smooth consumption over lifetime) and social cohesion. 

According to the IMF, social spending covers (the first two are traditionally thought of as social protection):

• Social insurance: financed by contributions or payroll taxes (such as public pension, health, unemployment, sickness and maternity leave 
• Social assistance: financed from general government revenue (such as universal and targeted transfers, child benefits, active labor market policies
• Public spending on health and education 

Social spending matters now more than ever because countries face a declining workforce but an increasing number of retirees (mostly in developed countries), negative effect of technology on work and wages for some workers with particular skills set, rising inequality (both income and opportunity), barriers to women’s labor force participation, and climate change, among others. 

• Advanced economies need to strengthen their health and pension systems to enhance spending efficiency and to expand coverage.
• Growing youth population and low women LFPR mean that emerging markets and developing countries have to absorb more women and youth into employment. Social benefit systems (and their financing) need to support, rather than disincentivize, their employability. For this education and training systems are critical.
• Technological change is transforming labor markets as mobility of labor across sectors increases and flexible work arrangements (part-time and temporary work, self-employment) become popular. These bring in more volatility to careers and income streams. AI and robotics could render a range of skills redundant and disrupt labor market. Adaptable education and training are crucial for continuously upgrading skills, and these should be complemented by policies to facilitate labor market matching.
• Climate change means increased risk from extreme weather events and natural disasters, severely affecting low-income and small island states and pushing many households into poverty. It will require enhancing capacity of their social safety nets. 

Therefore, social spending should be an integral part of macroeconomic policy. So how do we design the most effective social spending given fiscal space constraints? 

A recent IMF paper sheds light into this aspect.  Fiscal space is required to increase spending in education (free primary and secondary school education), healthcare (free basic healthcare), unemployment and elderly allowance, public pension, guaranteed minimum wage, etc.  These are also a part of SDGs and could be thought of as investment. These investments should be

• Adequate (spending adequacy): Higher social spending is required to fill the gap in education, healthcare and social protection coverage— especially important to achieve the SDGs. It is crucial to successfully transition to more normal career/life choices or outcomes.  
• Efficient (spending efficiency): High spending alone may not translate into high social outcomes. For instance, high education and health expenditure alone may not translate into higher graduation or enrollment and health outcome index. Such programs should not also create significant work disincentives, which could result in high unemployment and spending. Avoiding duplication of social spending programs is important to avoid high and inefficient administrative costs.
• Financed sustainably (fiscal sustainability): Sustainable financing requires an appropriate balance between financing, revenue mobilization, and spending in social protection transfers and investment in education, health and physical infrastructure.

The IMF considers social spending to be “macro-critical” through these three key channels. Also, choosing either universal or targeted transfers should be country-specific (social and political preferences) but consistent with fiscal and administrative constraints. The IMF will design programs and conditionality by considering social spending needs too. It will help countries strengthen tax capacity, improve the quality of social spending, and address data and information gaps. 

Financing strategy could include effective strategies to improve tax compliance; progressive personal income taxes for higher income groups; effective taxation of corporate income; a broad-based consumption tax; efficient taxation of goods with negative consumption externalities such as fossil fuels, tobacco and alcohol; and plugging in tax evasion and avoidance. 

Here is link to the background papers for IMF's engagement on social spending. Case studies here.

Nepal's fares better than most South Asian countries on the state of human capital

This year’s World Development Report focuses on the changing nature of work and the importance of productive human capital. The report argues that there is no need to become overly fearful of robots taking over jobs that have traditionally been done by humans. 

Technological progress (innovation) reshapes work, and firms adopt new ways to produce goods and services and to expand markets. Governments too can make use of technology to delivery effective public services. Differences in human capital now will have profound implication on productivity of the next generation of workers. 

Key highlights:

Technology changes the nature of labor demand, especially it reduces demand for low skilled workers but raises premium on high-order cognitive skills. This is especially true in the case of manufacturing jobs in some advanced economies and middle-income countries. But then technology has provided new opportunities to create new jobs, increased productivity and helped to deliver effective public services. 

Digital technologies allows firms to scale up or down production quickly; and platform marketplaces allows faster diffusion of technology to benefit general public.   

Three types of skills are particularly important: advanced cognitive skills (complex problem solving), socio-behavioral skills (teamwork), and skill combinations predictive of adaptability (reasoning and self-efficacy). 

Investing on human capital, especially education and health, must be a priority for governments. Policy measures include investing in people through nutrition, healthcare, quality education, jobs and skills. Accumulation of knowledge, skills and health helps citizens realize their potential and make them productive. Investment in physical and human capital complements each other. Creating formal jobs, better access to internet, investment in roads and municipal infrastructure, and social protection are vital to enhance human capital. Focusing on early childhood, tertiary education, and adult learning outside jobs could help in adapting to skills readjustment. 

The changing pattern of jobs and skills landscape necessitates social protection as well. Eight in 10 people in developing countries receive no social assistance, and 6 in 10 work informally without insurance. The report recommends expanding social protection coverage to cover the neediest people (and eventually universal coverage), exploring the feasibility of universal basic income, and placing community health workers on the government’s payroll. 

To create fiscal space, developing countries need to increase tax base (such as property taxes in urban municipalities and excise duty on sugar or tobacco), enhance efficiency of public administration (indirect taxes, reforming subsidies, closing global tax loopholes) and reduce the size of informal sector. Addressing informality in the absence of social protection for workers is a challenging policy issue.

Human Capital Index

The WDR 2019 also includes Human Capital Index (HCI), which measures “the amount of human capital that a child born in 2018 can expect to attain by age 18, given the risks of poor health and education that may exist in the country where she lives”. HCI ranges between 0 and 1, with a higher score indicating that a child born today achieves full health (defined as no stunting and survival up to at least age 60) and completes her education potential (defined as 14 year of high-quality school by age 18). 

Specifically, it is a composite score of five indicators: (i) the probability of survival to age five; (ii) a child’s expected years of schooling by her 18th birthday; (iii) harmonized test scores as a measure of quality of learning; (iv) adult survival rate (fraction of 15 year olds that will survive to age 50); and (v) the proportion of children who are not stunted. Indicators (ii) and (iii) is a measure of expected years of quality-adjusted schooling, which combines quantity and quality of education. Indicators (iv) and (v) are related to health dimension. 

For instance, Nepal has a HCI score of 0.49, meaning that a child born today in Nepal will only be half as productive as she could have been relative to the benchmark of complete education and full health. You could also think this of as the possibility of doubling GDP in the future if Nepal reaches the benchmark of complete education and full health. Nepal’s HCI is higher than the average for South Asia region.

On Nepal and South Asia:

Nepal ranked 102 out of 157 countries covered in the report. India ranked 115 (and has rejected the findings). Sri Lanka ranked 74.

Human Capital Index: A child born in Nepal today will be 49 percent as productive when she grows up as she could be if she enjoyed complete education and full health. In 2017, the HCI for Nepal is higher than what would be predicted for its income level. 

• In South Asia, Sri Lanka had the highest HCI score (0.58) followed by Nepal (0.49), Bangladesh (0.48), India (0.44), Afghanistan (0.39), and Pakistan (0.39).

Probability of Survival to Age 5: 97 out of 100 children born in Nepal survive to age 5. 

• In South Asia, probability of survival to age 5 is the highest in Sri Lanka (99 out of 100 children), followed by Bangladesh and Nepal, India, Afghanistan and Pakistan. 

Expected Years of School: In Nepal, a child who starts school at age 4 can expect to complete 11.7 years of school by her 18th birthday. 

• In South Asia, expected years of school is highest in Sri Lanka (13), followed by Nepal, Bangladesh, India, Pakistan and Afghanistan. 

Harmonized Test Scores: Students in Nepal score 369 on a scale where 625 represents advanced attainment and 300 represents minimum attainment.

• In South Asia, students’ harmonized test scores is the highest in Sri Lanka (400) followed by Nepal, Bangladesh, India, Afghanistan and Pakistan. 

Learning-adjusted Years of School: Factoring in what children actually learn, expected years of school is only 6.9 years. Children in Nepal can expect to complete 11.7 years of pre-primary, primary and secondary school by age 18. However, when years of schooling are adjusted for quality of learning, this is only equivalent to 6.9 years: a learning gap of 4.8 years.

• In South Asia, learning-adjusted years of school is the highest in Sri Lanka (8.3 years), followed by Nepal, Bangladesh, India, Afghanistan and Pakistan.

Adult Survival Rate: Across Nepal, 85 percent of 15-year olds will survive until age 60. This statistic is a proxy for the range of fatal and non-fatal health outcomes that a child born today would experience as an adult under current conditions.

• In South Asia, adult survival rate is the highest in Bangladesh and Sri Lanka (0.87), followed by Nepal, Pakistan, India and Afghanistan. 

Healthy Growth (Not Stunted Rate): 64 out of 100 children are not stunted. 36 out of 100 children are stunted, and so at risk of cognitive and physical limitations that can last a lifetime.

• In South Asia, Sri Lanka has the highest fraction of kids under 5 NOT stunted (0.83), followed by Nepal, Bangladesh, India, Afghanistan and Pakistan. 

UNDP’s HDI and WB’s HCI are complementary. HDI is a composite index of life expectancy, education and per capita income. HCI is also a similar index but it links the five indicators to (future) productivity and income levels. In other words, it shows how improvements in the current education and health outcomes shape the productivity of the next generation of workers. HCI touches upon SDGs 3 and 4. 

Meanwhile, India 

Rapid economic transformation in Nepal

It was published in The Kathmandu Post, 20 March 2017

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Rapid economic transformation

Implementing the vision would require consistent and committed political leadership, and a competent bureaucracy

Kenichi Yokoyama & Chandan Sapkota

Nepal has set a long-term vision to graduate from the Least Developed Country (LDC) category by 2022 and attain a prosperous, middle-income country status by 2030. The National Planning Commission is leading efforts to chart a bold and time-bound economic development roadmap to attain these goals. In this regard, the remarkable economic transformation of several Asian economies in a matter of a few decades provides important lessons for Nepal in its quest to achieve rapid, sustainable and inclusive economic growth. 

Economic structure

So far, Nepal’s economic transformation is not supported by growth-enhancing structural change. Economic structure and labour have shifted from low productivity agricultural to low productivity services, bypassing the industrial sector. In 1984, agricultural, service-based and industrial  sectors accounted for 61 percent, 26 percent and 13 percent of gross domestic product (GDP) respectively. Currently, while the agricultural sector accounts for 33 percent and the service sector a whopping 52 percent of GDP, industries account for just 15 percent of GDP. In effect, there is a gradual deindustrialisation since the industrial sector peaked at 23 percent of GDP in 1997.

Consequently, GDP growth has been low and volatile, depending mostly on the monsoon rains and remittance-fueled consumption demand in the service sector. Per capita GDP growth averaged just 2.6 percent in the last three decades, reaching $746 in 2016. Similarly, real annual GDP growth averaged 4.2 percent in the last three decades. GDP growth was above 8 percent in two instances only: in 1981 and 1984. In 1994, it grew by 7.9 percent. The economy has to grow by an average 8 percent each year to achieve its goal of becoming a middle-income country. 

Asian experience

The Asian experience—for instance the cases of Japan, Hong Kong, Singapore, Thailand, and Malaysia—provides valuable insight to initiate rapid structural transformation. 

These economies invested heavily in fundamentals and guided the economy with a clear vision, resulting in rapid and sustained economic growth. Initially, the structure of the economy was transformed by increasing the size and dynamism of the industrial sector. Agriculture played an important role by increasing labour and land productivity, stimulating growth in backward and forward linkages such as agro-processing, and releasing labour to help industrialisation. These were supported by stable fiscal and monetary policies that were occasionally unorthodox, and an investment-friendly policy regime. These strategies led to a sustained high growth rate. 

Furthermore, they invested heavily in infrastructure as a foundation for production and trading, prioritised human capital formation, fostered technology transfer, and strengthened institutions. This enhanced and sustained economic competitiveness and high per capita income levels. These measures were crucial in boosting productivity and value addition in the industrial sector, and in diversification and sophistication of productive services such as financial and IT systems. Here, well-planned and developed urban infrastructure was a critical catalyst.

In essence, pragmatic industrial promotion strategies along with access to markets, capital and technologies of more advanced economies helped these economics to rapidly take-off and boost per capita income. A clear and pragmatic development vision, incremental reforms to boost critical physical and social infrastructure, and strong institutional fundamentals and ownership underpinned this transformative process. 

Lessons for Nepal

The global investment, trade and financial regimes are different now compared to the times when these economies were taking-off and growing at high rates. As a latecomer, Nepal doesn’t have the same privileges, untapped potential and preferential market access opportunities. However, it does have significant opportunities to spur high growth by catering to the needs of the growing internal and favourable external markets through hydroelectricity, light manufacturing goods, high value agriculture products, tourism, and information technology development. Overall, raising productivity across all sectors will be the key. 

Note that enhancing per capita income to a middle-income level will be conditional on the correct positioning of micro and macro fundamentals. Faster catch-up is easier at this stage if productivity of agricultural and industrial sectors increases rapidly. In particular, a competitive manufacturing sector, which produces tradable goods, absorbs more labour, provides sustained sources of income and boosts entrepreneurship, is essential to move up the ladder of industrialisation. 

Nepal could point the macro fundamentals in the right direction by increasing the quantum and quality of investment in agriculture, transport, energy, urban development, education and skills, and healthcare. Nepal could also make progress by controlling inflation, improving governance and rolling out private sector friendly reforms. Some of these measures are an integral part of the government’s “second generation reforms”. However, the lack of effective implementation of policies and timely budget execution are subduing growth potential. Similarly, the micro fundamentals that need to be addressed are labour relations, land reforms, and anti-competitive practices, which are fostering inefficiencies and stifling growth opportunities in all sectors.

As the backbone of the economy, agriculture supports growth and livelihoods and lowers price volatility. Thus, enhancing land and labour productivity is crucial for a meaningful transformation. Productivity could be increased by using new technology and shifting traditional cropping practices to more high value added activities such as livestock, fruits, vegetables and agro-processing. It should be supported by transport networks, development of value chains, credit flows, irrigation and marketing.These call for well-structured programming and implementation of the Agriculture Development Strategy.  

Following the enhancement of agriculture, strengthening the industrial sector is vital for generating meaningful jobs and accelerating growth. Provisioning of infrastructure and supportive policy and institutional reforms are critical. Also necessary are pragmatic industrial promotion strategies, which could range from import replacement and export promotion that hinge on increasing domestic value added and employment, to establishing functional industrial zones and economic corridors. A range of industrial and trade policies/strategies are periodically updated and approved, but their effective implementation is not getting much attention.  

Nepal has a latecomer advantage in the light manufacturing sector, which normally absorbs semi-skilled labour force—similar to the workers who migrate overseas. Hence, it could get spill over demands from countries where wages are rising fast, provided that factors that supress competitiveness such as inadequate power supply, high cost of transport, and labour relations are addressed. Nepal could then gradually produce sophisticated goods that require higher knowledge, management skills and technology transfer. This would also complement high productivity services, ie moving from trading businesses to IT services, travel and tourism, and educational and healthcare services. 

Government’s role

The government has an important role to play in providing critical infrastructure, addressing market failures, designing a growth-enhancing tax regime, and implementing business-friendly policies to usher in a meaningful structural transformation. It also needs to enhance both the quantum and quality of public capital spending to over 8 percent of GDP annually. Given the sound fiscal space, though Nepal doesn’t have a shortage of funds until medium-term, a dearth of capacity to fully execute the budget and finish projects on time may prove problematic. 

Implementing the vision of a rapid economic transformation would require consistent and committed political leadership, and a competent bureaucracy. This would form the institutional fabric that helps translate good economics into good politics with economic development as the core theme. It ensures shared prosperity, makes reversibility of policies costly, enhances individual’s and firm’s confidence in the economy, and encourages the bureaucracy to provide faster and better service delivery.

With an appropriate mix of macroeconomic strategies, financial arrangements, smart project execution, and supportive institutions and policies, it is reasonable for Nepal to be upbeat about the possibility of a meaningful economic transformation and attainment of the long-term vision.

Yokoyama is Country Director of Asian Development Bank, Nepal resident mission; Sapkota is an economist. Views expressed in this article are personal

The 17 Sustainable Development Goals (SDGs)

Here is the list of the 17 SDGs agreed this week at the UN. There are many targets within each group. SDGs are the set of long term global development goals. They succeeded the MDGs.

1. End poverty in all its forms everywhere
2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture
3. Ensure healthy lives and promote well-being for all at all ages
4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts
14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
17. Strengthen the means of implementation and revitalize the global partnership for sustainable development

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The targets within Goal #8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all) are as follows:

8.1. Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries

8.2. Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors

8.3. Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4. Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programmes on sustainable consumption and production, with developed countries taking the lead

8.5. By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value

8.6. By 2020, substantially reduce the proportion of youth not in employment, education or training

8.7. Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms

8.8. Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment

8.9. By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products

8.10. Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

8.a. Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries

8.b. By 2020, develop and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization

Accelerating Post-earthquake Reconstruction for Faster Recovery in Nepal

This is adapted from the issue focus section of Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here, and FY2016 growth and inflation outlook here). It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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I. Introduction

A catastrophic 7.8 magnitude earthquake struck Barpak of Gorkha district on 25 April at 11:56 AM. In between numerous aftershocks of below 5 magnitude, two powerful 6.7 magnitude (26 April) and 7.3 magnitude (12 May) aftershocks shook a large part of the country, particularly central and western administrative regions. It caused further damage to the already weakened houses and physical infrastructure, and also triggered numerous landslides in the rural areas. The calamity has added a new challenge to Nepal’s short-to-medium term economic growth and development prospects.

The completion of post disaster needs assessment (PDNA), establishment of a National Reconstruction Authority (NRA) the reconstruction-focused budget and monetary policy for FY2016, and the gradual improvement in political environment have put in place the key prerequisites for the execution of reconstruction programs. Now, effectively operationalizing the NRA along with immediate planning and strategizing of reconstruction projects is critical for ensuring a fast and inclusive recovery. The NRA’s and sector ministries’ ability to swiftly prepare and implement the viable reconstruction projects will be a key determinant for speedy restoration of livelihoods and economic recovery.

The estimated 700,000-982,000 additional people pushed below the poverty line by the earthquake-induced income shock need to be pulled back above the line by providing them with jobs, skills and social protection as appropriate. The post-reconstruction programs need to be well coordinated, ensure ‘building back better’, and be an integral part of the larger goal of meaningful structural transformation of the economy.

II. Damages to lives and property

Over 8,800 were confirmed dead and 22,309 injured. Furthermore, 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. Furthermore, 2,673 and 3,757 public buildings were fully and partially damaged, respectively. To prioritize rescue and relief operations, the government declared 14 districts as severely affected (mostly in the central and western regions) although the earthquake has affected 31 of Nepal’s 75 districts.

III. Post disaster needs assessment

According to PDNA estimates, the cumulative damage and loss amount to 33.3% of GDP ($7.1 billion) and the cumulative need for recovery is estimated at $6.7 billion (31.5% of GDP). PDNA was spearheaded by the National Planning Commission with the support of various government agencies, development partners and civil society. It included 21 sectoral and thematic assessments.

 

Damages, losses and needs ($ billion)
Sector	Included sectors	Damage	Loss	Total needs
Social	Cultural Heritage, Education, Health and Population, Housing and Human Settlements	3.5	0.5	4.0
Productive	Agriculture, Financial Sector, Industry and Commerce, Irrigation, Tourism	0.6	1.2	1.2
Infrastructure	Communications, Community Infrastructure, Electricity, Transport, Water and Sanitation	0.5	0.1	0.7
Cross-Cutting	Gender, Social Protection, Nutrition, Employment & Livelihoods, Disaster Risk Reduction, Environment and Forestry, Governance	0.5	0.3	0.8
Total		5.1	2.1	6.7

Source: National Planning Commission

Of the total estimated recovery needs, about 50% is for rebuilding private housing and settlement. Productive and infrastructure clusters need 17.3% and 11.1%, respectively. These amount to about 5.5% and 3.5% of GDP, respectively. The recovery needs requirement for agriculture, education, electricity, and transport is estimated at $156 million, $397 million, $186 million, and $282 million, respectively. Furthermore, recovery of the tourism sector and restoration of cultural heritage are estimated to require $387 million and $206 million, respectively.

IV. Impact on economy

On 8 June 2015, the Central Bureau of Statistics estimated the macroeconomic impact of the earthquake. GDP growth (basic prices) is estimated to decline by over 1.5 percentage points to 3.0% in FY2015. Pre-earthquake growth estimate for FY2015 was 4.6%. Although the earthquake struck Nepal only in the tenth month of FY2015, the impact on GDP growth is sizable, especially on the services sector.

GDP growth (at basic prices), %

Source: Central Bureau of Statistics

Agricultural sector is expected to grow by 1.9%, industry by 2.7%, and services by 3.9%, down from earlier no-earthquake scenario forecasts of 3%, 3.5%, and 5.8%, respectively. 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.

The slowdown in the industry sector is due to the drastic drop in quarrying (stones, aggregates, sand and soil extraction slowing down in the affected districts, and the government’s policy to temporarily halt construction activities till mid-July 2015); manufacturing (physical damage, labor shortage, and weak demand); and construction (policy to temporarily halt construction activities, and low production of construction materials, among others).

The disruptions caused by the earthquake have been the most severe in the services sector. Overall, services growth is estimated to decline by about 2.1 percentage points to 3.9% in FY 2015. It grew by 6.4% in FY2014. Wholesale and retail trade; tourism activities (affects air transport, and hotel and restaurant businesses); real estate, renting and business activities; and education sub-sectors are the most affected.

Impact of earthquake on sectoral growth (%)

Source: Central Bureau of Statistics

Wholesale and retail trade grew by 9% in FY2014, but dropped to 3.4% after the earthquake (against the pre-earthquake forecast of 5.6%) in FY2015. This is primarily due to the slowdown in agricultural production and import of goods immediately 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 (including buying and selling, renting, and operation of self-owned or leased real estate; and renting of machinery, equipment and personal and household goods). There was also a substantial slowdown in property renting business due to the physical damage to buildings.

Overall, agricultural, industry, and services sectors will contribute 0.6, 0.4, and 2.1 percentage points to GDP growth of 3% (at basic prices) in FY2015, respectively. Nepal’s GDP is estimated at $21.6 billion in FY2015 ($371 million less than what would have been in a no-earthquake scenario). The loss is equivalent to 1.5% of GDP, and about 62% of the total gross value added[1] (GVA) loss is accounted for by the services sector.

Value added output loss by sub-sector in FY2015 ($ million)

Source: Central Bureau of Statistics

Per capita income is estimated to decrease by $23 compared to the no-earthquake scenario (in which case per capita income would have been $785). Accordingly, real per capita income increased by just 0.6% against 3.6% in a no-earthquake scenario.

Nominal per capita GDP (US$)

Source: Central Bureau of Statistics

Inflation was moderating till mid-April 2015, but it started edging up as a result of the supply-side disruptions caused by the earthquake. Prices of both food and non-food items increased in the last three months of FY2015, resulting in an average inflation of 7.2%.

External sector stability remained robust as net transfers increased sharply than the rise in trade deficit, resulting in a current account surplus of 5.1% of GDP and a record foreign exchange reserves ($8.3 billion, which is sufficient to cover 11.2 months of import of goods and nonfactor services). However, this may not be sustained for long as import of construction items is expected to increase drastically in the next few years for the post-earthquake reconstruction programs. Consequently, growth of net transfers may stabilize as migrant workers deplete their present and anticipated savings by remitting early to help households meet immediate needs. Furthermore, remittance inflows may also slowdown if there is less demand for workers in the Gulf countries and Malaysia following the cost-free migration policy[2] implemented by the on July 2015. Hence, the current account balance may slip into the negative territory over the medium term and foreign exchange reserves may deplete to an equivalent of around 7 months of imports, which is also the recommended level of reserve adequacy to ensure external sector stability.[3]

V. Impact on poverty and MDGs

The severely earthquake-affected 14 districts account for about 13.6% of the total number of people living below the poverty line in Nepal. Among them, Dolakha, Makwanpur, Ramechap, Rasuwa, Sindhuli, and Sindhupalchowk have higher poverty rate than the national average of 25.2% in 2011. Similarly, nine have human development index (HDI) score lower than the national average.

Preliminary estimates show that the income shock as a result of the earthquake will likely push an additional 700,000-982,000 people below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%. About 50%-70% will come from rural Central hills and mountains, where the vulnerability prior to the earthquake was already high. The income shock is largely felt through the loss of livelihoods (including death and injuries to primary wage earners) and the loss of housing, productive assets (seeds, livestock, and farm equipment), and durable assets (assorted household items).

Beyond this monetary-based poverty estimates, a larger impact can be expected when factoring in multidimensional poverty, which includes additional factors such as water and sanitation services, disruption of schools and health services, and the possibility of an uptick in food insecurity. The poor and vulnerable are particularly dependent on local infrastructure (roads, bridges, health posts, and schools) for access to labor and commodity markets, and for accumulation of human capital (especially those of children). Reviving local economic activities and resumption of basic public services along with an accelerated implementation of reconstruction projects will be critical to make up for the setback on poverty reduction caused by the earthquake.

Furthermore, the progress towards achieving the Millennium Development Goals (MDGs), on which Nepal was mostly on track prior to the earthquake, is likely to be adversely affected, given the widespread damages to houses, classrooms, and health posts. It will also likely affect the country’s overarching goal to graduate from the Least Developed Country (LDC) category by 2022.

VI. International Conference on Nepal’s Reconstruction

On 25 June 2015, the government organized an international conference on Nepal’s reconstruction. High level representatives from over 50 countries and multilateral agencies participated in the conference.

ADB, represented by its President, Takehiko Nakao, pledged $600 million—including $200 million emergency assistance approved by its Board of Directors on 24 June—to support rebuilding of schools, roads, and public buildings. The government estimated the total pledge of assistance at $4.0 billion (equally spilt in grants and concessional loans). Of the total pledge, about 67% is new commitment ($2.7 billion). Cumulatively, India and the Peoples’ Republic of China committed $1.4 billion and $767 million, respectively. World Bank, Japan, the US and the EU pledged $500 million, $260 million, $130 million, and $117 million, respectively.

According to the PDNA, total public sector losses and damages amount to $1.7 billion, which excludes housing. The National Planning Commission estimated that about 57% of the recovery needs ($3.8 billion), including housing, will have to be shouldered by the government. In this respect, the total pledged amount was higher than the public sector recovery needs till the medium-term. However, a much higher amount of investment may be needed in the long-term to build better and earthquake-resilient public infrastructure throughout the country.

Total aid pledged for reconstruction ($ million)

Source: Ministry of Finance; ADB staff estimates

VII. FY2016 Budget and Monetary Policy

The FY2016 budget is primarily focused on rehabilitation and reconstruction of physical and social infrastructure, housing and livelihoods after the catastrophic earthquake.

Completing of reconstruction work within the next five years is the most prominent agenda. It commits to fully operationalize the NRA soon, with a special implementation authority, effective leadership, and adequate financial resources. A total of NRs91 billion ($910 million or 3.8% of GDP) has been earmarked for reconstruction work, including $740 million (3.1% of GDP) for the National Reconstruction Fund, which will initially prioritize reconstruction of housing, public buildings, archeological structures, physical infrastructure, and enhancement of productive capacity. About $170 million is earmarked for sector ministries and agencies to carry out reconstruction works till the NRA is operational, i.e. an interim arrangement.

Planned reconstruction budget for FY2016 and composition of National Reconstruction Fund (NRs billion)

Source: FY2016 Budget Speech

The budget also includes NRs200,000 (about $2000) for each household that has lost its house due to the earthquake. To address the shortage of labor for reconstruction, skill training is planned for 50,000 people in the areas of masonry, plumbing, and electrical works.

Meanwhile, to assist government, Banks and Financial Institutions (BFI), and the public in their efforts toward accelerated post-earthquake recovery, Nepal Rastra Bank (the central bank) introduced a number of measures in the monetary policy for FY2016, including:

1. Zero percent refinancing facility for BFIs willing to provide loans at 2% interest to those households affected by the earthquake, provided that such households meet the requirements set by the government. Accordingly, households within and outside Kathmandu Valley can access the subsidized loans of up to NRs2.5 million and NRs1.5 million, respectively.
2. As announced in the FY2016 budget speech, the NRB will help assist in the establishment of an Economic Rehabilitation Fund, which will provide refinancing facility and interest subsidy to the business community affected by the earthquake.

Breakdown of reconstruction budget for FY2016
NRs billion	GON	Grant	Loan	Total	Share of aid
National Reconstruction Fund	16	36	22	74	78
Recurrent expenditure	8	15	12	35	77
Program expenses	2	0	0	2	0
Capital grants to institutions & individuals	6	15	12	33	82
Capital expenditure	8	21	10	39	79
Building construction	2	10	5	17	88
Civil works	6	11	5	22	73
Natural disaster relief & reconstruction	17	0	0	17	0
Recurrent expenditure	2	0	0	2	0
Capital expenditure	15	0	0	15	0
Civil works	5	0	0	5	0
Capital contingencies	5	0	0	5	0
Capital formation	5	0	0	5	0

Source: FY2016 Red Book; Budget Speech            

VIII. Effective reconstruction and recovery

Recovery has to be faster, better and smarter given that the country lies on an active geological fault lines. Drawing from ADB’s experience in post-disaster recovery in Asia and the Pacific region, ADB President Nakao highlighted, during the reconstruction conference, five principles for effective reconstruction that Nepal could follow:

1. Public as well as private buildings should be rebuilt to earthquake-resilient standards, fully applying the principle of “Build-Back-Better”.
2. Inclusiveness should be at the core of reconstruction effort. Special attention should be paid to the needs of the poor, rural residents, and other vulnerable social groups, who have suffered more from the earthquakes.
3. A robust institutional setup for reconstruction is pivotal to successfully execute reconstruction projects within the given timeframe. A strong leadership and competent human resources are vital for the success of the NRA.
4. Continuous enhancement of the institutional capacity of executing and implementing agencies along with the adoption of sound governance and fiduciary risk management systems for the reconstruction process are also important.
5. Effective donor coordination and strong government ownership of the entire process are also equally important for the success of the reconstruction projects.

He also emphasized that reconstruction should go hand in hand with development programs already planned, without affecting the latter.

IX. Accelerated recovery and structural transformation

The reconstruction authority’s and sector ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction, and hence the recovery phase. A coherent reconstruction strategy has to be ideally aligned with the long-term economic development vision, which aims to increase per capita income to the level of a middle-income country before 2030. This is especially important because the PDNA covered earthquake-resilient reconstruction only in the affected areas, whereas this has to be implemented throughout the country. Adhering to the principle of Build-Back-Better, t rebuilding damaged houses beyond the set size, retrofitting standing buildings in Kathmandu Valley and affected districts, and nationwide resilience (such as ensuring housing and school safety across the country) need to be kept in mind while planning and initiating rehabilitation and reconstruction projects.

Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment. This is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term. Promoting agribusiness, industrial capacity, innovation and high-productivity services need to be at the center of such a reconstruction and structural transformation strategy. In addition to higher investment, this will require reforms on institutional, legal, regulatory, and capacity enhancement fronts.

Structural transformation

Source: Authors’ estimate

Private investment has been suppressed primarily due to the liberal product market (including imports), but an unreformed factor market (land, labor, and capital) after 1992 (the time when the first set of liberalization reforms were rolled out). This has led to stunted growth of the manufacturing sector and its declining share of GDP as imported-based activities expanded. Given this background, a higher quantum and quality[4] of capital spending is vital to boost aggregate demand, expand the growth potential of the economy, and increase per capita income. Higher productivity-enhancing public capital investment would also increase returns on private investment, resulting in higher private investment due to the ‘crowding-in’ effect. Such public investment over the medium term in physical and social infrastructure enhances productivity growth, encourages technological innovation, accelerates recovery and establishes a faster, inclusive, and sustainable growth pattern. However, in the long term, structural changes, especially in factor markets (land, labor, and capital), are required to sustain the growth pattern established through stabilization measures over the medium term.

X. Concerns over effective budget execution

One of the biggest unknowns following the decision to establish the NRA is its ability to fully execute the planned reconstruction budget in well-planned productivity-enhancing projects. This concern arises from the persistent budget execution shortfalls even under normal circumstances, which has further weakened in the last decade. As such, actual capital spending averaged about 72% in the last decade and about 60% is bunched in the last quarter. Furthermore, the actual capital spending (about 3% to 4 % of GDP) is far less than the required spending (of 8-10% of GDP) to close the infrastructure gap..

Planned and actual capital spending (% of GDP)

Note: Changed reporting system to Government Finance Statistics (GFS) 2001 in FY2012. In FY2011, actual reporting was done based on GFS 2001, but budget allocation was done based on earlier GFS.

Source: Ministry of Finance; NRM staff estimates

Capital spending is marred mainly by:

1. Bureaucratic hassles: project approval delays, and weak intra and inter-ministry coordination,
2. Structural weaknesses: limited appraisal, planning, and implementation capacity of line ministries (including the lack of medium-term expenditure framework), lack of strong pipeline of projects ready for implementation, cumbersome laws and regulations (procurement and procedural clearances), and allocative inefficiency,
3. Low project readiness: lack of feasibility studies and detail designs in advance, lack of well-planned procurement plans, and delays in land acquisition,
4. Weak project management: high staff turnover, lack of staff capacity, lengthy procurement process, weak contractor capacity, and weak contract management
5. High fiduciary risks in project implementation, particularly in rural areas when programs are implemented through local government having limited human resources and capacity,
6. Political instability and interference at operational level

The budget for FY2016 partially addresses this concern by giving the line ministries administering large projects the authority to spend the planned budget without getting prior approval from the NPC and the MOF. Similarly, multi-year contracts are allowed for some projects and the government has committed to restrict transfer key project staff subject to satisfactory progress in implementation. Deployment of managers, accountants, and technical staff is envisaged in village development committees starting with earthquake affected areas. However, other issues outlined above impeding regular capital spending remain unchanged and it is likely that $170 million allocated to various line ministries for reconstruction work may remain underspent at the end of FY2015.

With regard to spending by the NRA, the ordinance, which needs to be transformed into an Act without delay, governing its establishment gives it sweeping powers to do away with most of the hassles impeding accelerated capital spending. The authority is chaired by the Prime Minister and its CEO will independently handle the operations. The CEO, whose performance will be critical to accelerated reconstruction within the given timeframe, was still not appointed two months after the ordinance for its establishment was introduced. This already delayed the pace of implementation, especially concerning hiring of human resources, preparing a quick pipeline of projects, an associated action plan for investment, and its overall synchronization with the long-term development vision being envisaged by the NPC. The faster the NRA comes into operation, the faster will be the capital spending and ultimately completion of the reconstruction programs.

The NRA will have a critical role in managing the following crucial issues for accelerated reconstruction and recovery:

• Hiring competent human resources that can bring in new and smarter ideas and foster innovation (including reassigning competent civil servants from across government departments)
• Preparing a credible time-bound action plan for investment in reconstruction projects, including a sizable pipeline of potential projects
• Managing political interference in normal operations and preparation of reconstruction projects and ensuring an inclusive development process
• Ensuring line ministries’ full ownership of projects designed, approved and procured by the NRA
• Coordinating with development partners to ensure that the committed funds for reconstruction are realized within the given timeframe
• Engaging meaningfully youth, local communities, think tanks, specialized institutes, and civil society in reconstruction planning, design, implementation, monitoring, and evaluation
• Ensuring ‘crowding-in’ of private investment for reconstruction on public-private partnership (PPP) basis
• Outsourcing of managerial as well as non-managerial work (time and output-bound contractual arrangement for design, supervision, and management of reconstruction projects).

XI. Conclusion

The earthquake caused tremendous loss of lives and properties. It lowered economic growth rate, pushed about a million people below the poverty line, slowed progress on achieving some of the MDGs, and sapped investors and consumer confidence. The cumulative pledges during the international reconstruction conference exceeded the expected public sector needs for reconstruction. Now, the NRA and line ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction and ultimately a better, faster and smarter recovery. The authority needs to be operationalized without delay and it has to chart out a coherent five-year reconstruction strategy by aligning it with the long-term economic development vision.

Accelerated reconstruction would require hiring of competent human resources, preparing a time-bound investment action plan, a strong pipeline of viable projects, outsourcing of design, monitoring and evaluation, political buy-in of proposed actions, and engaging youth, specialized institutions, and civil society at various stages of the project cycle. This would then ‘crowd in’ private investment as well, leading to a higher, sustainable, and inclusive economic growth. Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment, which is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term.

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[1] 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.

[2] The Ministry of Labor and Employment directed overseas recruitment agencies to facilitate migration without financially burdening the migrant workers. This essentially means cost-free migration for workers seeking employment in Saudi Arabia, Qatar, Kuwait, the United Arab Emirates, Bahrain, Oman and Malaysia.

[3] IMF. 2015. Nepal: Request for Disbursement Under the Rapid Credit Facility. IMF Country Report No.15/224. Washington, DC. See: http://www.imf.org/external/pubs/ft/scr/2015/cr15224.pdf

[4] Low quality of capital spending escalates future recurrent costs associated with the project (such as operation and maintenance costs, staff required to monitor the project, etc)