Thinking out of the box to rescue Nepal

The economic impact on Nepal of the COVID-19 pandemic will undoubtedly be large, and require thinking out-of-the-box to craft new strategies and effective policy responses.

The major outlines of the economic damage are already clear. The decline in the global economy and in the immediate neighbourhood will be more widespread and more prolonged than in previous crises. Tourism, exports, labour remittance, and other sectors relying on critical imports, could be depressed for long. There is also a large scale non-voluntary return of unskilled labourers from abroad.

An economy heavily dependent on remittances, where government revenue was also reliant on customs duties and taxes from the import binge fuelled by remittance inflow, was flawed to begin with.

Income in rural areas particularly increased greatly from foreign employment of unskilled labour, but all of the enduring capital assets increasing production capacity and generating future income streams were built abroad. Nepal’s migrant workers have no claim on that income stream. This model cannot now be repeated to the same scale.

This economic crisis must also not tempt us into the false security of self-sufficiency. The true lesson from this lockdown phase is the critical role of linkages to the global movement of goods, technology and factors of production, but inward-looking self-sufficiency is not the answer.

Nepal must still rely greatly on international trade and global investment resources to fashion a more resilient and externally-linked economy for the future. A self-sufficiency focussed Nepal will always be a poor Nepal.

Safely navigating these systemic risks requires new strategies, and these three key policy decisions can lay the foundations for a more prosperous post-COVID-19 Nepal:

1) A sharp devaluation of the Nepal currency against the Indian currency to boost export competitiveness in our largest market, but in effect a sharp devaluation against all currencies.

2) A Universal Basic Income (UBI) scheme for all resident Nepali citizens to provide a more effective safety net to those affected by the downturn and to compensate for the price increases from (1)

3) Greatly increased government expenditure in the immediate period, unsupported by tax revenues, and continuing high levels of public expenditure in the middle term, supported by increased revenue to fund the UBI and boost productive capacity of the economy in the medium term, focusing mainly on human capital investments.

These three policies in combination will provide substantial synergies so the total benefits exceed the sum of the components. These do not preclude the need for other programs to support businesses and specific sectors.

Nepal’s new future normal, Anil Chitrakar

Devaluation

The fixed exchange rate since 1993 of INR 100 = NPR 160 has to go. It was/is a clear drag on Nepal’s economy – the elephant in the room ignored for political expediency and fear. Differences in relative costs of production of similar goods, including food, between India and Nepal have substantially eroded Nepal’s competitiveness. While NPR has depreciated against USD, it remained fixed with the currency of our main trading partner, boosting their exports and supressing our own exports to them.

A common view in Nepal is that when India exerts undue political pressure, it is because we invite it through the ineptness and missteps of our politicians. A similar conclusion applies to the fixed INR exchange rate of almost 30 years: we are essentially handing India the stick to keep bullying us economically as well.

One common measure of divergence in production costs (changes in the GDP deflator) shows Nepal’s cost base increased 5.8 times between 1993 and 2018, compared to 4.0 times in India. That higher increase in Nepal can be reset only with a significant devaluation against the INR. Many input costs will increase for Nepali producers with a devaluation, but so will the scope to increase value added from domestic production, by reducing imports and increasing exports.

Hopefully that is concentrated in the agriculture sector where Nepal’s competitiveness has diminished greatly in recent decades. The decline in real income for all consumers from price increases will, however, have to be compensated. Hence, a UBI.

Devaluations are disruptive, and an open border increases risk of speculative capital flight. So, it has to be planned and executed with great care, including devising clever ways to avoid being second-guessed by market players.

The partial economic shutdown, and the general disruption in trade flows and labour movements between Nepal and India, in particular, makes this a good time. Short-term disruptions are a necessary cost to bear for the medium-term benefits of devaluation, which will boost domestic production.

India itself is a good example of how a persistent currency depreciation substantially improved its world trade position since the 1991 reforms. It currently exports around 20% of its GDP. Surprisingly, Nepal is the 10^th most important destination country for Indian exports. At around US$7 billion, Nepal accounts for slightly more than 2% of total Indian exports.

On the other hand, Nepal is number 62 in the rank of countries for India’s imports in 2019, accounting for less than 0.15% of India’s total imports, a minuscule share, even though India is the destination for around 66% of Nepal’s total exports. Hence, even a small increase in Nepal’s share in India’s total imports would be a big increase in Nepal’s total exports.

Whether the NPR should remain pegged to the INR after devaluation or other arrangements made is a separate secondary issue: critical need is to abandon the current fixed rate and devalue, and quickly.

Nepal’s airlines can take off again, Birendra B Basnet

Universal Basic Income

The UBI concept – where government pays everybody a uniform amount as part of its social welfare policy – is an old idea. The left consider it as effective antidote to poverty and rising inequality. The right see its basic simplicity as a better alternative than creating a more complex role for government. That role is captive to the politics of re-distribution when discretionary choices are made about who deserves large amounts of government handouts, who deserves some, and who none, and who pays for it.

The main hurdle is budgetary cost. In advanced economies the level of income required for basic living cannot be made a universal entitlement. UBI schemes are more affordable in poor countries, despite their accompanying poor record of capacity to tax.

The basic income can be very small, given existing low thresholds for defining poverty income levels. A commonly specified basic income level for poor countries is the average poverty gap – the amount by which average income among all poor people (under a poverty income threshold) differs from the poverty threshold income.

Providing that level of additional income to everyone as a UBI, including to all poor persons, will reduce the average poverty gap to zero (but some level of poverty will still remain among those whose actual incomes are below the initial average income of the poor).

Nepal lockdown chance for self-sufficiency in veggies, Ramesh Kumar

The World Bank’s estimate of the cost of UBI scheme for Nepal is 7% of GDP – Rs212billion or about 20% of total government expenditure in 2017-18. That is affordable.

The current level of social welfare spending In Nepal is estimated to be around 3.5% of GDP, but this includes pension payments for retired government employees. Expenditure on the pure welfare payments, such as the old age pension and support to single mothers and widows, is a much smaller component of GDP. So the UBI will be a big-ticket expenditure.

The World Bank assessment for Nepal was that almost everyone stands to win from a budget-neutral UBI simply because there were very few beneficiaries covered by other welfare programs that could be cut to fund a UBI.

Budget-neutral UBIs however are for normal times. We have to do better for a post-COVID-19 recession and post-devaluation times by committing to a higher level of the UBI without offsetting budget decreases, to provide basic income support in the immediate period, and by slowly increasing government revenues in future.

For the many labour migrants returning home from India and elsewhere a relatively generous UBI could make the difference in the incentive to try their luck domestically even if starting over takes a bit of time. UBI can also be transformational for sub-groups traditionally left out of the formal market economy.

Details have to be ironed out, but between 12-15% of GDP would be feasible for UBI in Nepal with some of the funding coming from reductions in other unproductive expenditure, and some through higher tax revenues.

In crisis times it is not so important to distinguish between productive and un-productive government expenditure – total public expenditure must increase to make up for the fall in private sector consumption and business investment.

Unlocking the economy post lockdown, Sanjib Subba

Governments all over the world have pledged large relief packages, with budget deficits that may last for many years, to boost their economies. Nepal should also adopt this approach to running large budget deficits in the immediate COVID-19 period, including for initial funding of the proposed UBI.

However it is financed, the Nepal UBI scheme must adhere to the three basic design elements: it has to go to everyone, all in cash, and with no conditions attached. Some generic restrictions can be imposed, say only adults 16 and over being eligible, and also require usual residence in Nepal. The key point is restrictions should be transparent.

This recent experience of mismanagement and also political gamesmanship seen in the in-kind targeted relief distribution in Nepal is indeed the ideal advertisement for a UBI. Most UBI proponents are willing to accept a less generous universal scheme for everyone, compared to a more generous scheme targeted to the poor only, or different levels of payment for different types of the poor or for different social/ethnic sub-groups. The universality element is also critical since the UBI is also meant to compensate for the price-level increase following devaluation of the NPR.

In the short term of the COVID-19 economic crisis, the UBI will take the role of a special relief payment designed to support the economy by boosting expenditures of the rich and poor to stimulate economic activity and provide indirect support to businesses.

Over the middle term, a UBI can help reduce the inefficiencies in public sector expenditures when it is becomes a general substitute for other poorly managed or inappropriately targeted welfare schemes. Over time, UBI should be seen essentially as a part of the civic rights of being a citizen of Nepal, on par with every other citizen.

Survive 2020, revive 2021, thrive 2022, Alisha Sijapati