NEPAL DEVELOPMENT UPDATE Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions July 23, 2020 Standard Disclaimer: This volume is a product of the staff of the In- The World Bank does not guarantee the accuracy ternational Bank for Reconstruction and Develop- of the data included in this work. The bounda- ment/The World Bank. The findings, interpreta- ries colors, denominations, and other information tions, and conclusions expressed in this paper do shown on any map in this work do not imply any not necessarily reflect the view of the Executive judgement on the part of The World Bank con- Directors of The World Bank or the governments cerning the legal status of any territory or the en- they represent. dorsement or acceptance of such boundries. Copyright Statement: The material in this publication is copyrighted. 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Table of Contents Acknowledgments................................................................................................................. i Abbreviations........................................................................................................................ ii Executive Summary........................................................................................................... xiii A. Recent Economic Developments......................................................................................1 B. Outlook, Risks, and Challenges...................................................................................... 18 C. Special Focus – Post-Pandemic Nepal – Charting a Resilient Recovery, and Future Growth Directions...............................................................................................................22 C.1. Emerging Indications of the Economic Changes induced by COVID-19.............................................. 24 C.2. Socioeconomic Impact of the Crisis in Nepal............................................................................................... 25 C.3. A Framework for Recovery and Resilience .................................................................................................. 28 C.4. Charting Nepal’s transition from Relief and Restructuring to a Resilient Recovery............................... 29 References............................................................................................................................42 Boxes Box 1. Relief and recovery measures as announced in the FY2021 budget........................................................ 4 Box 2. Policy measures to target credit to priority sectors and increase the availability of loanable funds .. 9 Box 3. Tax enhancement measures introduced prior to COVID-19.................................................................. 16 Box 4: Lessons from South Korea in Containing the Pandemic......................................................................... 23 Figures Figure 1. Delayed monsoons and armyworms caused paddy production to contract 1.7 percent in the first half of FY2020............................................................................................................................................................. 2 Figure 2. The number of new businesses registered declined in the first half of FY2020.............................. 2 Figure 3. International tourist arrivals declined while international migration was subdued in the first half of FY2020…................................................................................................................................................................. 2 Figure 4. …contributing to slower remittance growth and impacting consumption in H1FY20.................... 2 Figure 5. International tourist arrivals plummeted by 85.6 percent (y/y) between mid-March and mid-May 2020................................................................................................................................................................................. 3 Figure 6. Remittances dropped by 43.4 percent (y/y) between mid-March and mid-May 2020...................... 3 Figure 7. Merchandise imports declined substantially between mid-March and mid-May 2020…................. 3 Figure 8. …as did merchandise exports.................................................................................................................... 3 Figure 9. Inflation increased to a 4-year high from July to March FY2020, driven by food prices…............. 5 Figure 10. …as vegetable prices rose, owing to the export ban on onions by India......................................... 6 Figure 11. Food prices in Nepal follow the movements of food prices in India............................................... 6 Figure 12. The real effective exchange rate rose with the increased inflation wedge between Nepal and India................................................................................................................................................................................ 6 Figure 13. Interest rates breached the lower bound of the interest rate corridor (remaining mostly ineffective) for five out of the first eight months in FY2020… .......................................................................... 6 Figure 14. …and M2 growth remained below the FY2020 target of 18 percent, following slower private sector credit growth...................................................................................................................................................... 7 Figure 15. Deposit growth slowed, driven by lower institutional deposits.......................................................... 7 Figure 16. …keeping lending rates high.................................................................................................................... 7 Figure 17. The CAR also remains above the minimum requirement of 11 percent.......................................... 8 Figure 18. NPLs remain below 5 percent, but there is a concern about evergreening...................................... 8 Figure 19. Amid COVID-19, new loans to the private sector contracted by 64.7 percent (y/y) in March– May 2020, driven mainly by slower service sector growth................................................................................... 10 Figure 20. Goods imports contracted for the first time in 3 years...................................................................... 11 Figure 21. Merchandise exports continued to grow on the back of refined palm and soybean oil.............. 12 Figure 22. …but remittances growth remained tepid during the first 8 months of FY2020......................... 12 Figure 23. Migration outflows grew during the first 8 months of the FY as migration to Malaysia resumed….................................................................................................................................................................... 12 Figure 24. Amid COVID-19, goods imports during March–May 2020 decreased by 59.6 percent (y/y).... 13 Figure 25. Remittances contracted by 43.4 percent following the coronavirus outbreak due to stricter lockdown measures in major remittance-sending ................................................................................................. 14 countries....................................................................................................................................................................... 14 Figure 26. Foreign exchange reserves increased as foreign borrowing exceeded the current account deficit............................................................................................................................................................................. 14 Figure 27. …but federal expenditure expanded on the back of higher recurrent spending........................... 15 Figure 28. Revenue growth was at its lowest in four years driven mainly by a contraction in goods imports…..................................................................................................................................................................... 15 Figure 29. The challenge of underspending continued at all levels of government........................................ 17 Figure 30. The epidemiological curve shows that the daily number of new COVID-19 cases reached a high of 740 on July 3, 2020….................................................................................................................................. 20 Figure 31. …as there is an increasing inflow of Nepalese migrant workers from India through the open border .......................................................................................................................................................................... 21 Tables Table ES1: Priority Actions/Measures to move the economy to Resilience.................................................. xviii Table 1. Macroeconomic projections of selected key indicators for the baseline scenario............................ 19 Table 2. Economic support measures – including monetary, financial, and fiscal measures.......................... 27 Table 3. A Framework for Growth and Resilience ............................................................................................... 29 Table 4. Priority actions/measures to move towards a resilient recovery.......................................................... 38 Acknowledgments The Nepal Development Update is produced once the document. Sujata Bhandari processed the a year to report on key economic developments document. Overall administrative and logistical that occurred during the year, placing them in a support was provided by Anima Maharjan. The longer-term and global perspective, and to examine report also draws from background studies on (in the Special Focus section) topics of particular the impact of COVID-19 on Nepal’s economy, policy significance. The Update is intended commissioned by Department for International for a wide audience including policy makers, Development (DFID), Nepal and produced by the business leaders, the community of analysts and Economic Policy Incubator under the leadership professionals engaged in economic debate, and of Dr. Shankar P. Sharma. Consultations were the general public. also held with private sector representatives from the following sectors: Hotel Association This Update and Special Focus section was of Nepal; Nepal Airlines Operators Association; produced by the World Bank Macroeconomics Nepal Bankers’ Association, Independent Trade and Investment (MTI) team for Nepal Power Producers’ Association, Nepal Retailers’ consisting of Kene Ezemenari, Nayan Krishna Association, Federation of Contractors Joshi, and Florian Blum. The Special Focus section Association of Nepal. The report also benefitted benefitted from inputs provided by the following from discussions and consultations held with World Bank sector specialists: Aline Coudouel, The Roundtable on COVID-19 Response and Anastasiya Denisova, Soyesh Lakhey, Phillippe Role of Development Assistance, co-Chaired Leite, Jyoti Pandey, Jasmine Rajbhandary (Social by Dr. Swarnim Wagle (Institute for Integrated Protection and Jobs); Karthika Radhakrishnan- Development Studies-IIDS) and Faris H. Hadad- Nair, Mohan Aryal, Maya Sherpa (Education); Zervos (Country Director, World Bank). Members Jonas Parby (Urban); Kari Hurt and Manav of the Roundtable included: Rameshwor Khanal Bhattarai (Health); Siddhartha Raja (Digital (former finance secretary); Dr. Shankar P. Development); Tijen Arin, Drona Ghimire, Sharma (former NPC vice chair); Dr. Bimala Andrea Kutter, Andrew Mitchell, Urvashi Narain, Rai Paudyal (National Assembly Member); Dr. Annu Rajbhandari, and Josefo Tuyor (Forestry Lhamo Yangchen Sherpa (Senior Research, and Green Growth); Peter J. Mousley and Sabin Monitoring and Evaluation Advisor, Ipas Nepal); Raj Shrestha (Private Sector Development and Shishir Khanal (Chief Executive Officer, Teach Financial Sector); Rubika Shrestha, Shyam KC, For Nepal); Pawan Kumar Golyan (Chairman, Feriha Mugisha (Water); Purna Chhetri and Golyan Group); Moushumi Shrestha (Director, Karishma Wasti (Agriculture); Sri Kumar Tadimalla Shreenagar Agritech Industries Pvt. Ltd.); Biswas (Transport); Xiaoping Wang, Barsha Pandey, Teuta Gauchan (Director of Economic Policy, IIDS) Kacaniku, Gailius Draugelis (Electricity); Hiroki Mukhtor Khamudkhanov (Asian Development Uematsu, Nethra Palaniswamy (Poverty and Data); Bank); Lisa Honan (Department for International Philippe De Meneval and Sumit Baral (Tourism). Development, Nepal); Chip Bury (USAID); Oversight in preparing the report was provided Elisabeth von Capeller (Embassy of Switzerland). by Mona Prasad under the overall guidance of Manuela Francisco, Faris H. Hadad-Zervos, and The cutoff date for data included in this report Zoubida Allaoua. Akash Shrestha managed media was June 30, 2020. relations and dissemination. Diane Stamm edited i Abbreviations COVID coronavirus disease DHS Demographic Health Survey DOI Department of Immigration FY fiscal year H1FY first half of fiscal year ILO International Labor Organization IMF International Monetary Fund INR Indian rupee LIBOR London Interbank Offered Rate MOH Ministry of Health NPL nonperforming loans PPP public-private partnership VAT value-added tax WASH water, sanitation, and hygiene y/y year-on-year ii Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Executive Summary Recent Economic Developments 1. Nepal’s economy faced headwinds in the drop in arrivals of 4.3 percent (year-on-year), and first half of FY2020. Following three consecutive an associated slowdown in tourism receipts. years of substantial economic expansion, with growth averaging 7.3 percent per year, Nepal’s 2. With slower economic activity, imports economy experienced headwinds in the agriculture, declined in the first half of FY2020, narrowing manufacturing, and the service sectors in the the external deficit but adversely affecting first half of FY2020. The agriculture sector was revenue collection. The decline in aggregate impacted by a delayed monsoon coupled with an demand led to a contraction in goods imports by 3.9 outbreak of armyworms, leading to a 1.7 percent percent (year-on-year) in the first half of FY2020. (year-on-year) decline in paddy production. In the The contraction was broad based, encompassing manufacturing sector, tightening domestic credit construction material and machinery, industrial conditions, an increased foreign direct investment supplies, and food and beverages for household threshold, and continued low execution rates consumption. Services imports also contracted for of public investment projects resulted in a the first time in four years on the back of lower contraction of investment and the number of new travel and education service imports. At the same businesses registered. Services were impacted by time, a strong goods export performance due the deceleration in remittances growth and lower to increased palm oil and soybean oil exports to tourist arrivals from India, leading to an overall India countered a contraction in services exports, July 2020 World Bank Group xiii Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update narrowing the current account deficit by 44 4. COVID-19 has increased external and percent (year-on-year). The reduction in goods fiscal pressure by reducing foreign currency imports, however, contributed to a deceleration in inflows and revenues. As a result of the government revenue collection, which is heavily pandemic, services exports, goods exports, reliant on duties, excise, and value-added taxes and remittances contracted by 57.4 percent (VATs) collected at the border. Between July 2019 62.1 percent, and 43.4 percent, respectively, and March 2020, revenues grew by 12.2 percent between March and May 2020 compared to the compared to the same period in the previous same period in the previous year. The resulting year, which is the lowest rate since FY2016. pressure on foreign reserves was moderated by a Government expenditure expanded by 9.4 percent substantial decline in goods and services imports, over the same period due to a higher recurrent which decreased by 59.6 percent and 59.5 percent, spending on wages and compensation, goods and respectively, between March and May 2020, year- services, social assistance, and fiscal transfers. on-year. As a result, the current account deficit is estimated to decrease to 7.2 percent of GDP in 3. The global COVID-19 pandemic imposed FY2020 from 7.7 percent in FY2019. While Nepal both a supply and a demand shock on Nepal’s was able to contain external pressures resulting economy, which adversely affected growth. from COVID-19, the pressure on its finances The global crisis induced by the pandemic has been rising. Government revenues contracted initially impacted Nepal through the tourism by 51 percent between March and May 2020 sector, with arrivals from China dropping by compared to the same period in the previous year. around 70 percent in February and a full stop to At the same time, COVID-19 relief measures have the issuance of visitor visas taking effect in early increased government spending and are estimated March 2020, which has effectively dropped tourist to result in a fiscal deficit of 7.3 percent of GDP in arrivals to zero. The impacts of the pandemic FY2020, compared to 2.6 percent in the previous did not remain limited to tourism. On March year. The government aims to finance the deficit 21, the Government of Nepal announced a through concessional resources from international nationwide lockdown, which affected industrial development partners and domestic borrowing. and agricultural production, leading, for instance, to more than a 25 percentage point decline in 5. The Government of Nepal has responded capacity utilization of industry by early June 2020 to the crisis through fiscal and monetary and a 64.7 percent (y/y) drop in credit provision to measures. Fiscal measures targeted by the the private sector during the two-month lockdown government fall into three broad categories. period. Demand for consumption and production First, there are immediate health measures aimed products, such as diesel and petrol, slowed, with at increasing access to testing for COVID-19 many Nepalese experiencing job losses or the infections and the establishment of quarantine inability to outmigrate due to widespread travel facilities, as well as a waiver on customs duties for restrictions. A domestic outbreak of COVID-19 medical items related to COVID-19 such as masks, commenced in May, prolonging the lockdown and sanitizer, and surgical gloves. Second, to reduce imposing substantial human and further economic the crisis’ impact on livelihoods, the government costs. As a result of the impact of COVID-19, has implemented food distribution programs, GDP growth in Nepal is estimated at 1.8 percent extended eligibility for the Prime Minister’s in FY2020, compared to 7 percent in FY2019. Employment Program, and provided discounts on Growth in the service sector is now estimated at utility bills. Third, to provide economic support to 1 percent, the lowest since FY2002, while growth firms, the government has deferred the payment in the industrial sector is estimated at 3.2 percent, of taxes and provided concessional loan facilities a four-year low, due to the deceleration in overall to severely affected sectors. The cumulative cost growth. of these programs is estimated at 5 percent of GDP. Measures taken by the Nepal Rastra Bank July 2020 World Bank Group xiv Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update – the central bank – were aimed at providing risk relates to the potential of revenue shortfalls liquidity support to banks and facilitating the and further fiscal slippages: while the budget provision of credit to the private sector. The key for FY2021 has proposed measures to manage measures announced by the central bank included an anticipated shortfall in revenue, a prolonged a relaxation of regulatory requirements for banks economic downturn risks reducing revenues and financial institutions and a reduction of further while requiring an increase in spending to targeted interest rates as part of the country’s manage the socioeconomic fallout of the crisis. interest rate corridor. Such a situation could elevate the deficit to 11.5 percent of GDP. Outlook, Risks, and Challenges 8. In addition to the measures already 6. Nepal’s economic outlook remains adopted, a strategic and systematic approach uncertain. Despite efforts by the government to is needed to address the above risks. Such an curb the economic fallout of the crisis, its impact approach that incorporates a medium- to long- on livelihoods and the economy is expected to be term view would include the relevant reforms and profound. Under a baseline scenario, where global measures to support an inclusive and green growth. infections and economic stress begin to ease, This edition of the Special Focus outlines the key growth is projected at 2.1 percent (year-on-year) elements of a strategic approach to transition in FY2021. Even though this scenario assumes a the economy from the relief stage through to gradual economic recovery, growth is expected to restructuring and a resilient recovery. remain subdued due to the challenging outlook on tourism and remittances and lower industrial Special Focus and agricultural production due to lasting supply Post-Pandemic Nepal – Charting a chain disruptions. The current account deficit is Resilient Recovery, and Future Growth projected to narrow to 6.5 percent of GDP, with Directions imports remaining below precrisis levels due to lower economic activity and low oil prices. While 9. The global COVID-19 pandemic has lower imports will continue to limit revenue altered economic behavior that will affect collection, fiscal measures announced as part growth going forward. With over 10 million of the FY2021 budget, including a revision of infections, 400,000 deaths, and a global GDP customs duties, will provide some support to the contraction of 5.2 percent, the global impact budget as spending levels on relief and recovery of COVID-19 is unprecedented. The impact of efforts remain elevated. Taken together, the fiscal the crisis is not temporary but is likely to induce deficit is projected to reduce marginally to 6.6 lasting changes in the way that economies operate. percent of GDP in FY2021. The following four trends are indicative of how economies’ modus operandi will change as they 7. Risks are tilted to the downside. Given emerge from the crisis: its unprecedented nature, the global economic uncertainty associated with the COVID-19 • Inward Orientation: Increased barriers to pandemic is exceptional. Should cases in Nepal the movement of goods and people is likely to continue to rise and should a rebound in economic alter trade and tourism, and limit outmigration activity in the country’s major trading partners opportunities. and remittance-sending countries be delayed, growth in FY2021 risks turning negative, with a • Increased Vulnerability and Inequality: contraction of 2.8 percent possible. Due to the The economic crisis has resulted in job losses large share of the informal economy, an economic across the board and particularly affected workers contraction would risk exacerbating poverty, in the informal and gig economy who have little or inequality, and food insecurity. An associated no access to safety nets, accelerating inequality and July 2020 World Bank Group xv Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update poverty. the country brings the pandemic under control and infection rates level-off, the economy can re-open • Digitization: Lockdowns have accelerated a gradually, leading to the restructuring stage. The focus push towards digitization, moving trade in goods in this stage is on strengthening health systems and and services, social interactions and the provision adjusting to a new normal that prioritizes domestic of public services, online. employment generation in a greener and more digital economy. The resilient recovery stage focuses • Green Growth: Climate change presents on new opportunities to invest and reforms to an equal if not larger economic risk than the promote more sustainable, inclusive and resilient pandemic, which has led to a global impetus growth in a post-COVID world. towards an environmentally sustainable economic recovery post COVID-19. 12. Each of the stages has been structured around four pillars. These pillars include • Debt: Given the large economic shock, measures related to health, social protection, leverage of governments, firms and individuals is economic measures and cross-cutting priorities: likely to rise in the aftermath of the crisis, with the potential for systemic risks. • Health interventions are critical to save lives and ensure sustainable human capital 10. For Nepal to emerge stronger from the growth going forward. In the relief stage, the crisis, it will be necessary to adapt quickly to focus of health measures is to contain the spread this new reality. Nepal is still at an early stage of the virus and to preserve health services of the crisis, with a domestic outbreak having for non-COVID-related infections. Priorities commenced only in May 2020 and infection thus involve testing, treating and isolating the rates continuing to rise. The crisis has forced the infected, which includes the build-up of testing Government of Nepal (GoN) to make tough capacity, quarantine centers and specialized health choices. The national lockdown that has been facilities. Information flow among different in place since March 2020 has been effective in levels of government will be critical at this stage. curbing the rapid spread of the virus. However, it In the restructuring stage, efforts can focus on has adversely affected the livelihoods of workers increasing the capacity of the health system, for in the informal sector. This has generated adverse instance through private sector participation and a knock-on-effects, for instance, leading households strengthening of federalism and restarting crucial to neglect health care or education and contributing vaccination programs. Developing guidelines to to a reported increase in gender-based violence. manage the gradual easing of the lockdown will The GoN has initiated select policy measures also be important. In the resilient recovery stage, to buffer the economic impact of the crisis and building systems for future disease prevention, has started to gradually ease the lockdowns, but outbreak response and health surveillance will be a comprehensive roadmap for the response and critical. This would include developing standard recovery will be necessary. By drawing on global operating procedures to address future pandemics experiences, this roadmap can allow Nepal to adjust and maintain health service delivery during crises. to the new modus operandi induced by the crisis. • Social support is needed to protect the 11. An economic framework to chart Nepal’s livelihoods of the poor and vulnerable from emergence from the crisis can be structured current and future shocks and build human in three stages: relief, restructuring and a capital. In the relief stage, a quick disbursement resilient recovery. During the relief stage, the of cash or in-kind transfers to the most affected priority is on addressing the immediate health and vulnerable households will be critical. An impacts of the pandemic and providing support expansion of the Prime Minister’s Employment to livelihoods and firms to reduce vulnerability. As Program to cover newly unemployed workers July 2020 World Bank Group xvi Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update and returning migrants will be key to protect households and firms. Essential services also need livelihoods. Alternative approaches to distance to be maintained together with removing barriers learning could be adopted including radio, TV, and to internet access. In the restructuring phase, SMS to ensure broader coverage of students. In the expansionary fiscal and monetary policy will likely restructuring stage, providing employment through continue but with increased emphasis on raising public employment programs and supporting revenues and maintaining debt sustainability. It entrepreneurship would help along with continued will also be important to assess the impact of the provision of cash or in-kind transfers. The country crisis on the financial sector and the health of will also benefit from support to mobile banking utility companies so as to plan for a sustainable and digital financial services, and through the recovery. Increased emphasis on broadening establishment of a digitized social registry. Efforts internet access will support service delivery, with will also need to be made at getting children back some non-essential services also resuming during to full-time schooling accompanied with enhanced this stage. In the resilient recovery stage, it will be school sanitation and health protocols. In the important to undertake efforts to rebuild fiscal resilient recovery stage, the focus needs to be on buffers and strengthen financial sector stability. a strengthened social protection system which can Pandemic preparedness, financial sustainability of effectively address future shocks, employment utilities and a strengthened federalism architecture support measures through reskilling and revised will enable smooth and resilient public service migration policies, and an education system which delivery. In addition, enhanced digital systems is more inclusive and digitally oriented. and connectivity will support service delivery and private sector growth and business continuity. • Economic support to firms will be Finally, key elements of green growth would important to generate employment and pivot include sustainable and resilient infrastructure, them towards a greener economy, while strengthened solid waste management and air and managing debt overhang. In the relief stage, water pollution control. time-bound liquidity support should be provided to the most affected firms with the objective 13. The table below proposes actionable of increasing employment. The agriculture and measures that the government can undertake. tourism sectors could be prioritized, given their This crisis will require a multi-faceted response criticality for food security and employment. In given the wide-ranging impact. These measures the restructuring stage, continued support to will support the government’s efforts in providing firms, including through recapitalization, will be relief and building a resilient recovery. needed. Private sector recovery can be supported through targeted investments in digitization and by providing fiscal incentives for green investments. In the resilient recovery stage, efforts need to be aimed at strengthening physical, digital and financial infrastructure to develop e-commerce platforms, enhance access to finance and promote green growth. • Cross-cutting priorities would need to focus on fiscal sustainability, financial sector stability, a more digitally oriented and green economy and resilient public services. In the relief stage, the focus needs to be on accommodative monetary and expansionary fiscal policy to support banking sector liquidity and provide relief to July 2020 World Bank Group xvii Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table ES1: Priority Actions/Measures to move the economy to Resilience Relief Restructuring Resilient Recovery • Ensure quarantine facilities • Scale-up public health • Adopt emergency response plans, are well-equipped and priorities like immunization including standard operating build testing capacity campaigns, and surveillance procedures for both emergencies and • Deliver specific guidance and reporting systems essential services. to Provinces, Palikas, and • Allow greater private sector • Strengthen operational procedures facilities for delivery of participation in COVID and for proper management of health essential health services non-COVID health service care waste Health during COVID-19 delivery • Implement new service delivery • Have a dedicated team at • Develop guidelines for health modes such as telemedicine to the Ministry of Health and and safety of the private sector increase resilience to shocks Population (MoHP) and in as the economy opens up • Strengthen local level health service each Province to monitor delivery mechanisms and report on essential service delivery • Provide emergency cash • Continue to provide cash or • Fully deploy the social registry, to or in-kind transfers using in-kind transfers to the poor ensure future shock-preparedness existing delivery systems and vulnerable and deploy • Strengthen the social protection for social safety nets or electronic payment systems system by implementing social through employment • Support employment through security allowances, strengthening programs public works programs, the design of existing programs • Expand coverage of revised migration policies and including informal workers in existing programs (such and entrepreneurship support contributory schemes as the Prime Ministers through banking and non- • Provide employment support by Employment Program) banking channels, together reskilling and redeploy those who lost • Support distance learning with business skills training their livelihoods and adopting strong programs for all using • Establish a social registry, to migration policies TV, radio, SMS, internet, help identify beneficiaries and • Strengthen the education system Social printed materials coordinate programs to withstand further shocks by • Take steps to get children increasing connectivity, adopting the back to school including re- Emergency Education Operations enrolment campaigns and Procedures and developing and incentives together with delivering e-education services measures to maintain social through local government or district distance (staggered shifts, office kiosks alternate week schedules) and enhanced school sanitation and health protocols • Re-direct short-term vocational training to essential and priority sectors July 2020 World Bank Group xviii Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table ES1: Priority Actions/Measures to move the economy to Resilience Relief Restructuring Resilient Recovery • Allow (temporarily) social • Provide matching or • For informal enterprises increase security, tax and rental/ conditional grants, loan access to finance, through digital utility deferrals, provide restructuring and equity financial services, mobile banking, wage subsidies, suspend infusion to firms, in a selective and digital literacy import duties for critical and time-bound manner • Implement the Credit Information supplies, and avoid the • Provide fiscal incentives for and Reporting Act and the amended impact on credit scores green investments, including Secured Transactions Act to expand • Announce a time bound enhancing energy efficiency, the basis for lending beyond fixed subsidized emergency hygiene and sanitation, waste collateral financial package for management, and the adoption • Adopt comprehensive and long- priority sectors like tourism of cleaner technologies term insolvency and out-of-court and agriculture. • Streamline and simplify procedures • Support Palikas in the approval processes for • Accelerate key investment climate distribution of relief investment reforms impacting foreign direct Economic packages (seeds and • Strengthen corporate and investment (FDI) flows and firm Support fertilizers) to affected consumer insolvency regimes entry and operation farmers and centrally and out-of-court settlement • Develop guidelines to support procure agriculture procedures environmental management (waste produce to respond to • Expand the reach and management, air quality, water quality) food security needs coverage of mobile banking investments at tourism destinations and digital financial services, and promote eco-tourism. and the use of non-collateral • Invest in food storage and distribution based lending infrastructure • Support programs to promote digital literacy and establish information technology centers to facilitate access to the internet and computers July 2020 World Bank Group xix Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table ES1: Priority Actions/Measures to move the economy to Resilience Relief Restructuring Resilient Recovery • Increase the fiscal allocation • Continue with increased • Increase tax revenues through to health, social protection budget allocation for income reforms in tax policy and and employment programs and employment programs administration including streamlining • Mobilize concessional • Explore additional sources of the import and export tax regimes resources from revenue through wealth and and reducing tax expenditures development partners carbon taxes • Strengthen the public investment • Adopt monetary easing • Avoid imposing trade program and prioritize growth and to provide liquidity to the restrictions green investments as well as the banking system • Prepare a strategy to wind development of essential and green • Maintain the provision of down fiscal incentives and infrastructure essential services like water, strengthen debt management • Adopt targets for fiscal consolidation sanitation and hygiene and • Assess the impact of the crisis and debt reduction and monitor electricity through the local on the financial sector and contingent liabilities arising from governments prepare a financial recovery utilities and systemic firms and banks • Remove barriers to internet strategy • Implement the financial recovery access (access restrictions • Strengthen and scale up the strategy and strengthen the regulatory to under-utilized fiber- Deposit and Credit Guarantee and supervisory framework for the optic backbone) and Fund and explore regulatory banking system digital infrastructure to amendments to enable • Implement pandemic preparedness Cross-Cutting enable social distancing financial institutions to offer plans for essential service delivery, Priorities and maintain business digital financial products and restore the financial health of utilities, continuity services fully resume non-essential services • Implement regulatory and adopt increased digitization measures to broaden internet in service delivery, especially for access by sharing telecom- payment collections and usage ready infrastructure across records sectors and strengthen • Strengthen the federalism competition architecture through appropriate laws • Continue to maintain and guidelines and capacity building essential services but also to ensure improved service delivery undertake critical repairs to • Strengthen cybersecurity laws and infrastructure, resume some promote awareness on cybersecurity of the non-essential services, via an informational campaign and prepare a plan to ensure • Promote broadband internet access financial sustainability of and digital payments utilities • Develop sustainable and resilient • Reinforce the progress towards infrastructure and strengthen solid federalism with a focus on waste management and air and water capacity building efforts pollution control July 2020 World Bank Group xx Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update A. Recent Economic Developments Real Sector 1. After three years of growth that exceeded adversely impacted earnings in the service sector 6.5 percent, Nepal’s economy experienced (Figure 3). The industrial sector was impacted significant headwinds in the first half of FY2020. by an increased threshold for foreign direct Growth in remittances, tourism1 , manufacturing, investments and tightening domestic credit market and agriculture slowed significantly and contributed conditions, which resulted in a contraction of to a deceleration in overall GDP growth in the first newly established domestic and foreign businesses half of FY2020. Prior to the COVID-19 outbreak, by 16.7 and 33.9 percent, respectively, compared agricultural output was already affected by delays in to the previous year (Figure 2). the monsoons; an outbreak of armyworms, which damaged crops in many parts of the country; and 2. Slower outmigration impacted remittances the proliferation of fake “Garima” paddy seeds, (and private consumption), while weak budget leading to a decline in paddy production by 1.7 execution constrained public investment in the percent, year-on-year (Figure 1). A deceleration first half of FY2020. Remittance receipts grew by in remittances growth and a 4.3 percent drop in a mere 1.3 percent in the first half of FY2020, international tourist arrivals, especially from India, significantly lower than the 17.6 percent achieved 1 Although tourist arrivals declined, travel earnings increased by 14.6 percent in the first half of FY2020. July 2020 World Bank Group 1 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update in the first half of FY2019, following a 16-month in the first half of FY20. Demand did, however, halt in labor migration to Malaysia (Figures 3 and receive support from increased government 4). At the same time, public investment remained consumption, following salary increases for non- weak due to a low capital budget execution rate gazetted and gazetted2 officers of 20 percent of only 15.4 percent, 2.3 percentage points below and 18 percent, respectively, and an expansion of the level achieved in the first half of FY2019. merchandise exports, which grew by 22.2 percent As remittances are a key source of financing following an increased demand for palm and for private consumption, these developments soybean oil in India. jointly depressed demand, including imports of constructions materials and consumption goods, Figure 3. International tourist arrivals declined with aggregate imports declining by 3.4 percent while international migration was subdued in the first half of FY2020… Figure 1. Delayed monsoons and armyworms caused paddy production to contract 1.7 percent in the first half of FY2020 Sources: NTB, DoFE, and World Bank staff calculations Note: Data are for the first six months of the FY. Figure 4. …contributing to slower remittance Sources: MoALD and World Bank staff calculations. Note: Data for FY2020 cover only first six months. growth and impacting consumption in H1FY20 Figure 2. The number of new businesses registered declined in the first half of FY2020 Sources: DoC, NRB, and World Bank staff calculations. Note: Data are for the first six months of the FY. Private consumption is proxied by imports of consumption Sources: DoI and World Bank staff calculations. goods. Note: Data are for the first six months of the FY. 2 Gazetted officers are executive level ranked public servants in Nepal. July 2020 World Bank Group 2 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Figure 5. International tourist arrivals plummeted to raise an estimated US$2 billion in tourism by 85.6 percent (y/y) between mid-March and receipts. However, the onslaught of COVID-19 mid-May 2020 has resulted in an estimated revenue loss of US$1 billion and the destruction of 1 million jobs in restaurants, hotels, and the airline industry (ODI 2020). This caused service sector growth to reach its lowest level since FY2002, at 1 percent, with a significant contraction in the transport and hotel sectors. As the pandemic evolved, labor migrants Figure 7. Merchandise imports declined substantially between mid-March and mid-May 2020… Sources: NTB and World Bank staff calculations Figure 6. Remittances dropped by 43.4 percent (y/y) between mid-March and mid-May 2020 Sources: NRB and World Bank staff calculations Figure 8. …as did merchandise exports Sources: NRB and World Bank staff calculations 3. The outbreak of the COVID-19 pandemic exacerbated existing headwinds through various channels, contributing to a forecasted deceleration of growth to 1.8 percent in FY2020. The pandemic first hit the tourism sector in February 2020, causing arrivals from China, where the virus initially took hold, to contract by 70 percent. Travel restrictions were imposed by Sources: NRB and World Bank staff calculations mid-March, including a moratorium on visas upon arrival and closure of the international airport. As from Nepal’s main migrant destinations (that is a result, tourist arrivals dropped to zero from April India, Malaysia, and the Gulf countries) began to 2020 onward (Figure 5). This was in stark contrast return. As a result, remittances dropped by 43.3 to the tourist arrival targets set as a part of the percent between mid-March and mid-May 2020 “Visit Nepal 2020” program. Under this program, compared to the same period in the previous year international arrivals were targeted to increase (Figure 6). from 1.2 million to 2 million and were expected July 2020 World Bank Group 3 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update 4. A national lockdown, implemented in have decelerated to a four-year low of 3.2 percent. mid-March 2020, was initially successful at The knock-on effects of the lockdown caused a stopping the spread of the virus but led to contraction of construction, manufacturing, and significant economic disruptions. The impacts mining, with growth in the sector as a whole of the lockdown were felt across the economy. In lifted to positive levels only due to a substantial the service sector especially wholesale and retail, expansion of electricity production. hotels, restaurants and transport, the effects were severe. There were also pronounced effects on 5. Travel restrictions and the lockdown the industrial and agriculture sectors. Industrial are estimated to have significantly increased capacity utilization dropped from a pre-COVID unemployment, which in turn affects baseline of 75 to 80 percent to 46 percent in June consumption. Indications are that widespread 2020. Daily peak energy consumption, which layoffs coupled with the return of labor migrants is closely correlated with industrial production, have increased unemployment and created dropped from pre-COVID levels of 1000 an excess supply of labor. For instance, the megawatts (MW) to 700 MW in June 2020. The Federation of Contractors’ Association of Nepal agriculture sector was affected through disruptions estimates that out of the 2 million workers in the in the transport of agricultural products to and construction sector, only around 200,000 were at from farms, leading, for instance, to scarcities of work in April 2020. In addition, while an estimated fertilizer supplies, and through a lack of availability 50 to 80 percent of workers are still employed, of farm labor. In addition, with corporate demand not all of them work at full capacity (ODI 2020). for dairy products affected by the lockdown, for The loss of livelihoods has impacted demand. For example, by tea shops or sweets factories, dairy instance, available daily data from the Ministry cooperatives were not collecting milk and farmers of Industry, Commerce, and Supplies show that were forced to discard their produce. Disruptions average daily diesel and petrol consumption in import supply, following Nepal’s border declined by 33.1 and 15.2 percent between April closures with India and China, led to a scarcity 1 and June 10, 2020. The Government of Nepal of intermediate goods for large manufacturing (GoN) has suggested initial measures to provide firms and resulted in a 60 and 62 percent drop of economic, social, and medical support to address merchandize imports and exports between mid- the crisis as part of its FY2021 budget (see Box 1). March and mid-May 2020 (Figures 7 and 8). As a result, growth in the industrial sector is estimated to Box 1. Relief and recovery measures as announced in the FY2021 budget Estimated costa Details NPR 3 billion (a) Work for relief program to workers in the informal sector impacted by COVID-19: The relief will be provided in the form of wages to workers willing to participate in construction works initiated by the federal, provincial, and local governments. For those who do not want to work, the relief will be continued in the form of food as before, but they will receive food relief equivalent to 25 percent of the daily wages paid to the workers who participate in construction works. NPR 14 billion (b) Concessional loans for small and medium-sized industries and COVID-19-affected tourism sector: A fund of NPR 50 billion will be createdb to provide loans at the interest rate of 5 percent for the purpose of operation of business and payment of salaries. NPR 8 billion (c) Discount on electricity fee: A discount of 25 percent on the electricity fee for individuals consuming electricity up to 150 units in a month and a discount of 15 percent for individuals consuming electricity up to 250 units in a month. The fee will be waived for individuals consuming electricity up to 10 units a month. A 50 percent discount will be provided on demand charges for industries during the lockdown period. July 2020 World Bank Group 4 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Estimated costa Details NPR 20 billion (d) Refinancing facility to COVID-19-affected sectors: A provision will be made through the Nepal Rastra Bank (NRB) to provide a refinance facility of up to NPR 100 billion at the interest rate of 5 percent for COVID-19-affected industries in the agriculture, cottage, small and medium-sized enterprise, hotel, and tourism sectors. Not available (e) Extension of insurance policy: The insurance policies of COVID-19-affected industries and transportation will be extended until the lockdown ends. Not available (f) Provision for bringing back foreign Nepalese migrant workers: These include those who lost jobs or whose visa expired or who have health risks. NPR 1.5 billion (g) Social security contribution waived for workers and firms during the lockdown period: The government will make contributions (on behalf of workers) to the contribution-based Social Security Fund during the lockdown period. NPR 1.5 billion (h) Discount for domestic airlines: Discounts will be provided on parking fees, airline licensing renewal fees, flight qualification certification charges, and the infrastructure tax on aviation fuel. Note: a. These figures are based on information presented during the press conference held by the Ministry of Finance after the announcement of the budget speech on May 28, 2020. b. This will be operated through the NRB. Inflation a real effective exchange rate appreciation of 2.1 percent (Figure 12). 6. Increases in food prices elevated inflation to a four-year high in the first half of FY2020. Figure 9. Inflation increased to a 4-year high from Prices increased by an average of 6.4 percent July to March FY2020, driven by food prices… during the first half of FY2020, significantly higher than the 4.2 percent recorded in the same period in FY2019 (Figure 9). The increase in the inflation rate stemmed from food prices, which grew to a four-year high of 8.6 percent, owing to a spike in vegetable prices as India imposed an export ban on onions from September 2019 to mid-March 2020 (Figure 10). Lower housing and utility prices kept non-food inflation at 5 percent in the first half of FY2020, the lowest since the corresponding period of FY2008. Due to the peg with the Indian rupee (INR) at 1.6 NPR to 1 INR, Sources: NRB and World Bank staff calculations. inflation follows the price movements in India with a lag (Figure 11). As a result, an increasing inflation wedge of 0.8 percent in the first half of FY2020 between Nepal and India contributed to July 2020 World Bank Group 5 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Figure 10. …as vegetable prices rose, owing to the 7. The drop in demand induced by the export ban on onions by India COVID-19 pandemic reduced inflation from late March onward. The weak demand for non-food items and services due to the national lockdown and COVID-19 led to a decrease in average inflation to 6.3 percent from March to May 2020. Average non-food inflation during this period fell to 4.1 percent. By contrast, supply and trade disruptions in the agriculture sector caused an acceleration in average food inflation to 9.2 percent, significantly higher than the 8.6 percent recorded prior to the pandemic. Monetary Policy and the Financial Sector Sources: Kalimati Fruits & Vegetable Market Development Board and World Bank staff calculations. 8. The Nepal Rastra Bank (NRB) Figure 11. Food prices in Nepal follow the encountered difficulties in liquidity movements of food prices in India management in the first eight months of FY2020. Nepal maintains a peg of its currency to the Indian rupee, which limits monetary policy to managing short-term liquidity in the banking system. Since FY2017, the NRB has aimed to use an interest rate corridor for the weighted average interbank rate in combination with repo and reverse-repo operations to manage short-term interest rates. At the beginning of FY2020, the NRB lowered the policy rate (and the associated target range) from 5 percent to 4.5 percent. However, realized interest rates fell below the lower bound for almost five of the first eight Sources: NRB, RBI and World Bank staff calculations. Figure 12. The real effective exchange rate rose Figure 13. Interest rates breached the lower bound with the increased inflation wedge between Nepal of the interest rate corridor (remaining mostly and India ineffective) for five out of the first eight months in FY2020… Sources: IMF and World Bank staff calculations. Sources: NRB, RBI, and World Bank staff calculations. July 2020 World Bank Group 6 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Figure 14. …and M2 growth remained below the and a slowdown in remittance growth, which FY2020 target of 18 percent, following slower limited personal deposits (Figure 15). As a result, private sector credit growth the lending rate remained high at 11.8 percent in March 20201 (Figure 16). Credit provision has also become more concentrated in the real estate sector, following an easing of regulatory hurdles for first-time homebuyers. As a result, in the first eight months of FY2020, the share of new real estate loans to total new credit increased to 9.7 percent, compared to 6.9 percent in the previous year. The NRB has taken multiple measures to facilitate credit provision to the private sector (see Box 2). Figure 15. Deposit growth slowed, driven by lower Sources: NRB and World Bank staff calculations. institutional deposits months of FY2020 (Figure 13). This occurred as the NRB injected substantial liquidity into the system to address shortages during the Dashain festival (September 29, 2019 to October 13, 2019) and the period following the deadline for advance payment of taxes (January 14, 2020), but was unable to mop up excess liquidity once liquidity shortages had subsided, causing short-term interest rates to drop below the target range. 9. Lower deposits and regulatory measures reduced credit provision to the private sector. Sources: NRB and World Bank staff calculations. Note: Data are for the first eight months of the FY. During the first eight months of FY2020, credit Figure 16. …keeping lending rates high provided to the private sector grew by 11.3 percent, the lowest growth since the corresponding period of FY2017, leading aggregate money supply (M2) to remain below the 18 percent growth target for FY2020 (Figure 14). This followed regulatory reforms, which tightened provisioning requirements for financial institutions and eligibility criteria for non-business loans. In addition, loanable fund growth was limited as deposits grew by only 8 percent in the first eight months of FY2020, compared to 9.7 percent a year prior. This was because of the reduction in the NRB-mandated ceiling for institutional deposits Sources: NRB and World Bank staff calculations. 1 While lending rates remain high, the weighted interest rate spread has reduced from 5.5 to 5 in the first eight months of FY20, and there has been a change in deposit mix, with time (term) deposits exceeding savings in order to take advantage of significantly higher returns on longer term deposits. July 2020 World Bank Group 7 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update 10. Financial sector stability indicators 753 local governments to have a bank branch in remained adequate in the first half of FY2020. their locality. The availability of liquid assets – measured as net liquid assets to total deposits – for all banks Figure 18. NPLs remain below 5 percent, but and financial institutions remained above the there is a concern about evergreening regulatory requirement of 20 percent during the first six months of FY2020. All of Nepal’s banks and financial institutions also meet the regulatory capital adequacy ratio (CAR) of 11 percent. In January 2020, the CARs of state-owned and private commercial banks stood at 13.7 percent and 15.3 percent, respectively, while the CARs of development banks and finance companies were also above the regulatory requirement (Figure 17). The share of nonperforming loans (NPLs), defined as the loans that are overdue by 90 days or more, stood below 5 percent in January 2020 Sources: NRB and World Bank staff calculations. (Figure 18). However, in the first half of FY2020, aggregate NPLs increased (year-on-year) for all banks and financial institutions, with more than 11. More recently, the crisis induced by the 15 percent growth for private and public sector COVID-19 pandemic increased deposits and commercial banks, and more than 30 percent decreased private sector credit. COVID-19 had growth for development banks and finance three effects on the monetary and financial sector companies. This was because elevated lending rates in Nepal. First, it led to a drop in private sector pushed some borrowers into default. The 2018 credit: new loans to the private sector decreased NRB supervision report of commercial banks also by 64.7 percent between March and May 2020 suggests that loans are frequently evergreened, compared to the same period the previous year, which is likely to artificially keep NPL ratios low reflecting a slowdown in economic activities and limited service hours of bank branches during Figure 17. The CAR also remains above the the lockdown (Figure 19). Second, new deposits minimum requirement of 11 percent – driven by individuals – grew by 82.8 percent, reflecting precautionary savings and a deferment of tax payments. Third, monetary aggregates increased in May 2020 due to substantial growth in net foreign assets as COVID-19 led to a further decline in imports and an increase in foreign exchange reserves. As a result, M2 grew by 16.1 percent in May 2020 (y/y), higher than in March 2020, but still below the FY2020 monetary policy growth target of 18 percent. Sources: NRB and World Bank staff calculations. and mask risks to asset quality. The number of commercial bank branches grew by 17.8 percent in the first eight month of FY2020, strengthening financial inclusion and enabling nearly 746 of the July 2020 World Bank Group 8 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Box 2. Policy measures to target credit to priority sectors and increase the availability of loanable funds The NRB has taken measures to expand concessional and priority sector lending. This is being achieved through the following measures: 1. A minimum target for the number of beneficiaries to which each bank branch must extend concessional lending 2. An expansion of the definition of priority sectors 3. A reduction in the refinancing rate in the productive sectors 4. Easing the lending requirement in the productive sectors. For example, on November 27, 2019, the NRB issued a directive that would require each commercial bank to disburse concessional loansa to at least 500 borrowers, development banks to 200, and finance companies to 100 by mid-July 2020. The directive was triggered by banks and financial institutions’ (BFIs’) unwillingness to extend such concessional loans to the targeted groups. In addition, the NRB also expanded the definition of priority sector for commercial banks by including the export sector; small and medium-sized enterprises; and the pharmaceutical industry, cement industry, and garment industry in addition to the already existing agriculture, energy, and tourism sectors. This definition of priority sector is consistent with the definition that has been used for development banks and finance companies. As a result, priority sector lending of commercial banks increased to 42 percent of total lending in January 2020, compared to 31.1 percent in July 2019. Moreover, the NRB also reduced the interest rate on refinancing to 3 percent from the previous 5 percent for project loans of NPR 1 million to support small and medium-sized enterprises, and to 3 percent from the previous 4 percent for loans to the energy, agriculture, and livestock sectors, returnee migrants, and the construction of physical infrastructure. It also waived the requirement of tax payment certificates and allowed BFIs to extend loans of between NPR 5 million and NPR 20 million to agriculture, tourism, and small and medium- sized enterprises based only on tax filing documents. The NRB also introduced several measures to increase the availability of loanable funds, which included: 1. Requiring commercial banks to issue a minimum of 25 percent of their paid-up capital as debentures (by FY2020) denominated in NPR and with a maturity period of at least five years, with proceeds to be used to extend loans 2. Allowing BFIs to borrow in convertible currencies from foreign pension funds, hedge funds, and other similar sources, in addition to the existing provision of borrowing from foreign BFIs, with interest rates and fees capped at the six-month LIBOR plus 4 percentage pointsb 3. Allowing BFIs to collect foreign currency fixed deposits with at least a two-year maturity from institutional foreign depositors and nonresident Nepalese and enabling BFIs to extend loans equivalent to 100 percent of such deposits in Nepalese rupees 4. Allowing BFIs to treat loans that have been received from a foreign bank, financial institution, or other organization in foreign currency for a duration of three years or more as deposits in calculating the core capital and extending loans accordingly. As a result of these measures, the Local Currency Credit to Core Capital and Local Currency Deposit (CCD) ratio of BFIs – a measure of the availability of loanable funds – decreased in January 2020 but continues to remain elevated for all but finance companies and public sector commercial banks. Among BFIs, the decrease in the CCD ratio was the highest for finance companies and the lowest for July 2020 World Bank Group 9 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update development banks. Finally, the NRB introduced several regulatory measures, which included: 1. Not allowing BFIs to include interest-income received from investments in government securities (August 2019) while computing the weighted average interest rate on credit. This would lead to a decrease in the weighted average interest rate on credit and in turn the base rate. 2. Requiring commercial banks to maintain the spread at not more than 4.4 percentage points by FY20, and development banks and finance companies at not more than 5 percentage points by end-FY20. 3. Not allowing BFIs to increase the premium rate that is added to the base rate in less than six months. Note: a. The concessional loans are provided to the following loan categories as per the FY2019 budget: loans to youths with higher education to start their own business; project loans for returnee migrants; project loans for women; business loans to the Dalit community; education loans to economically deprived, marginalized, and targeted communities for pursuing higher studies and for technical and vocational education; loans for the construction of private housing of earthquake victims; and commercial agriculture and livestock loans. b. The maturity of such loans is set at one and five years and the loans are to be invested only in the productive sectors such as renewable energy, physical infrastructure, tourism, agriculture, and small and medium-sized enterprises, but not in real estate. Figure 19. Amid COVID-19, new loans to the private sector contracted by 64.7 percent (y/y) in March–May 2020, driven mainly by slower service sector growth Source: NRB and World Bank staff calculations. Note: This figure is a tree map, where the total area represents the stock of private sector credit as of mid-March 2020, and the size of each rectangular box represents the share of components of private sector credit by industry categories. The color in the rectangular box indicates the growth rate of new private credit for March–May 2020; the light shaded box represents the component with the higher positive growth rate (for example, Health and Social Work). 12. The NRB responded to the COVID-19 associated bounds of the interest rate corridor from pandemic through measures aimed at 4.5 to 3.5 percent in late March 2020. The NRB providing liquidity and facilitating private further directed banks and financial institutions sector credit. To address anticipated liquidity on April 28, 2020, to apply interest rate discounts shortfalls, the NRB lowered its policy rate and the of up to 2 percentage points for borrowers from July 2020 World Bank Group 10 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update COVID-19-affected sectors between mid-April at the same point in FY2019. The contraction and mid-July 2020. To increase the availability stemmed from a trade deficit that decreased from of loanable funds, the NRB further relaxed US$5.9 billion to US$5.5 billion over the same provisioning requirements for the banking sector, period. The trade deficit was partly financed by for instance, by allowing banks to disburse loans remittance receipts, which amounted to US$3.9 equal to all fixed deposits with more than one year billion in January 2020, approximately equal to the remaining duration and allowing them to consider value in January 2019. the loans or deposits that have been received from a foreign bank, financial institution, or other 15. The trade deficit narrowed on the back organization in foreign currency for a duration of of a contraction in merchandize imports, one year or more as deposits. The measures taken prior to the COVID-19 outbreak. Aggregate by the NRB (see also Box 2), together with weaker merchandize imports for July to March FY2020 demand for new credit resulted in a 0.8 percentage shrank by 2.8 percent in nominal terms compared point decrease in the lending rate by May 2020, to the same period the previous year due to with its level remaining high at 11 percent. a slowdown in reconstruction activities, an import ban on energy and flavored synthetic 13. COVID-19 impacted key stability drinks, and a ban on onion exports by India indicators of the financial system. The between September and March 2020 (Figure 20). consolidated profit and loss statement of banks and financial institutions for the ninth and 10th months Figure 20. Goods imports contracted for the first of FY2020 shows that key financial indicators were time in 3 years adversely impacted by the national lockdown and relief measures of the NRB. Interest income from March to May 2020 contracted by 10.7 percent compared to the same period the previous year. This was driven mainly by a reduction in interest income from loans and advances in response to NRB’s directive to extend the repayment date of monthly and quarterly loan installments to after the lockdown. The CAR of major banks decreased in response to the lockdown, with 14 commercial banks reporting a decrease of over 5 percentage points for from July to April FY2020, but all banks Sources: DoC and World Bank staff calculations. remained above the regulatory threshold. Liquidity Note: Data are for the first eight months of the FY. measures introduced by the NRB were effective in boosting banks’ liquidity position, with net Services imports, whose share in total imports is liquidity of public commercial banks increasing significantly lower than that of goods, contracted to 24.8 percent in April 2020 from 24.2 percent by 8 percent in nominal terms over the same period. in January 2020, with smaller increases clocked by While merchandize exports are substantially private commercial and development banks. smaller than imports in Nepal, accounting for only 3.3 percent of GDP in FY2019, they continued to External Sector grow in the first half of FY2020 and contributed to a narrowing trade deficit (Figure 21). Nominal 14. Nepal’s current account balance improved merchandize export values expanded by 22.1 due to a lower trade deficit in the first half of percent in the first eight months of FY2020, 3.6 FY2020, before the crisis hit. By the end of the percentage points more than in the previous year. first half of FY2020, the current account deficit The expansion in goods exports was propelled by stood at US$744 million, 44 percent lower than July 2020 World Bank Group 11 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update exports of refined palm and soybean oil to India, Figure 23. Migration outflows grew during the which are exempted from import duties under the first 8 months of the FY as migration to Malaysia South Asian Free Trade Area Agreement (SAFTA), resumed… and partially compensated for a contraction in service exports, which decreased by 3.9 percent in the first eight months of FY2020 on the back of falling exports for government and other services. Travel service exports increased despite a decline in international tourist arrivals. Figure 21. Merchandise exports continued to grow on the back of refined palm and soybean oil Sources: DoFE and World Bank staff calculations. Note: Data are for the first eight months of FY. 16. Remittance inflows increased in nominal terms, albeit at a slower pace, following slower outmigration prior to FY2020. Remittance inflows increased by 1.7 percent in the first eight months of FY2020 (Figure 22). While these elevated remittance inflows rose Sources: DoC and World Bank staff calculations. to a high of US$5.2 billion, remittance growth Note: Data are for the first eight months of the FY. was significantly lower than the 11.7 percent Figure 22. …but remittances growth remained recorded for the same period in FY2019. tepid during the first 8 months of FY2020 This resulted from a more than 60 percent contraction in migrant outflows between FY2014 and FY2019 following a labor dispute with Malaysia and slowing demand from Qatar and Kuwait. While migration to Malaysia resumed following a bilateral agreement signed in September 2019 and the number of migrant workers increased considerably in the first eight months of FY2020, this has yet to affect remittance inflows because of the lagged impact of migrant outflows on remittance inflows (Figure 23). 17. The effects of the COVID-19 pandemic Sources: NRB and World Bank staff calculations. led to a substantial reduction in imports. Note: Data are for the first eight months of FY. Between March and May 2020, merchandize imports contracted by 59.6 percent compared to the same period the previous year, with consumer durables and semi-durables and transportation equipment suffering the sharpest decline (Figure 24). Intermediate goods like food and beverages were least affected due to the increase in imports July 2020 World Bank Group 12 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update of sugar and crude soybean and sunflower oil 2020 until July 21, 2020, has dealt a severe blow to (for processed foods and beverages), and imports services exports. of rapeseed, husked rice, and durum wheat (for primary food and beverages). Services imports 19. Remittance inflows were also affected, plummeted by 42.8 percent over the same period, with outmigration stopped and many migrants mostly as a result of fewer students studying returning. The government decided on March 12, abroad during the pandemic. 2020 to suspend all types of labor approval for foreign employment until further notice, which 18. Goods and services exports nosedived practically eliminated outmigration between as the pandemic hit. As a result of COVID-19, March and July 2020, with only select groups goods exports during March to May 2020 allowed to return to work abroad from July. In tumbled by 62.1 percent compared to the same addition, many migrants have returned from India period in the previous year. Especially exports and other countries as their jobs were impacted of agroforestry products (for which Nepal has a by the pandemic. As a result, remittance inflows comparative advantage as listed under the Nepal during March to May 2020 declined markedly by Trade Integration Strategy), suffered a sharp 43.4 percent (Figure 25). On aggregate, the decline decline due to COVID-19. Refined palm oil and in imports outweighed the contraction of exports soybean oil exports continued to expand with and remittances, leading the current account year-on-year growth of 7.6 percent and 22.5 deficit to narrow by 52 percent (y/y) in the first 10 percent, respectively. Services exports contracted months of FY2020. On aggregate, Nepal’s current by 42.6 percent owing to a fall in tourist arrivals, account deficit is estimated to stand at 7.2 percent which contracted by 89.2 percent. Suspension of of GDP at the end of FY2020, 0.5 percentage visas on arrival and the eventual shutdown of points lower than in FY2019. international commercial flights from March 22, Figure 24. Amid COVID-19, goods imports during March–May 2020 decreased by 59.6 percent (y/y) Sources: DoC and World Bank staff calculations. Note: The figure is a tree map, where the total area represents the total goods imports for the first eight months of FY2020, and the size of each rectangular box represents the share of import components by “Broad Economic Classification.” The color in the rectangular box indicates the growth rate for the ninth month of FY2020; the light-shaded box represents the component with the higher positive growth rate (for example, Food and Beverages, Primary, for Industry). July 2020 World Bank Group 13 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Figure 25. Remittances contracted by 43.4 percent FY2020, Nepal had accumulated US$1.2 billion following the coronavirus outbreak due to stricter in foreign liabilities, 64 percent higher than the lockdown measures in major remittance-sending previous year. The public sector accounted for countries about half of these liabilities, much of which was accumulated as part of the country’s response to the COVID-19 pandemic. As the accumulation of foreign liabilities exceeded the current account deficit, official reserves increased and covered approximately 10.8 months of imports by mid- May 2020 (Figure 26). Fiscal Sector 21. Nepal’s fiscal position had seen some deterioration prior to the COVID-19 pandemic. While Nepal had achieved budget surpluses until Sources: Oxford University and World Bank staff calculations. FY2016, the transition to federalism and associated Note: The Stringency Index takes a value between 0 and spending increases had turned the country’s fiscal 100, with a higher value indicating stricter policies. balance negative, with deficits averaging 4.1 percent of GDP between FY2017 and FY2019. Figure 26. Foreign exchange reserves increased as In addition to increased expenditure, a reliance foreign borrowing exceeded the current account on taxes collected at the border through customs deficit duties, excise, and value-added taxes (VATs) has made revenue collection vulnerable to external shocks. These broad trends affected Nepal’s fiscal stance in the first eight months of FY2020. Public expenditure between July and March FY2020 was 9.4 percent higher than in the same period the previous year, a substantial acceleration compared to a growth rate of 0.3 percent in FY2019 (Figure 27). The increase was mainly driven by recurrent spending, which contributed 8.2 percentage points to expenditure growth and accelerated on the back of increased wages and compensation, goods and services, social assistance, and fiscal transfers to Sources: NRB and World Bank staff calculations subnational governments. Capital spending also Note: Data as of mid-May of the FY. increased by 6.9 percent, driven by a low base due to a contraction of capital spending in the 20. The current account deficit was primarily previous year. financed through foreign borrowing. The external deficit stood at US$938 million in May. 22. In the first eight months of FY2020, Foreign direct investment inflows into Nepal are a slowdown in imports resulted in central comparatively small and stood at US$145 million government revenue growth falling to its at the end of May 2020, US$30 million more than lowest level in four years. Revenue collection for in FY2019. Portfolio flows are nonexistent. As a July to March FY2020 was only 12.2 percent higher result, Nepal’s current account deficit is primarily than over the same period the previous year, which financed through borrowings. Until May of is a four-year low (Figure 28). The deceleration in revenue growth followed a contraction in goods July 2020 World Bank Group 14 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update imports and was thus reflected in a slowdown FY2020 budget downward during the fiscal year, in the growth of the VAT (9.1 percent year- reducing targeted expenditure by 9.6 percent and on-year growth), most of which is collected at targeted revenue by 5 percent, with most of the the border; excise tax (2 percent, year-on-year); expenditure revision accounted for by the capital and customs (which contracted by 2.2 percent). budget. These tax components expanded by more than 10 percent (y/y) each in the first eight months of Figure 28. Revenue growth was at its lowest in the previous three fiscal years. Unlike trade-related four years driven mainly by a contraction in goods taxes, income tax collections grew at a three-year imports… high of 29 percent due to an increase in public sector wages and enterprise profits. Non-tax revenues also rose by 40.6 percent on the back of an increase in interest and dividend receipts from service-oriented institutions including financial institutions. Tax enhancement measures also contributed to the increase in income and non-tax revenues (Box 3). Figure 27. …but federal expenditure expanded on the back of higher recurrent spending Sources: MoF and World Bank staff calculations. Note: Data are for the first eight months of the FY. 24. The COVID-19 pandemic significantly reduced revenues. Following the COVID-19 outbreak, public revenue collection between March and May 2020 was 51 percent lower than in the same period a year prior. This was driven by three factors. First, a slowdown in economic activity reduced the domestic tax base. Second, a significant reduction in goods imports following Sources: MoF and World Bank staff calculations. trade disruptions and lower demand impacted Note: Data are for the first eight months of the FY. Nepal’s key trade-related tax bases. Finally, policy measures aimed at easing the tax burden during 23. The GoN continued to significantly the crisis, including deferred tax payments and underspend its budget. During the first eight filing as well as customs and excise duty reductions months of FY2020 only 40 percent of the total for essential items to address the pandemic, budget, 46.9 percent of the recurrent budget, impacted tax bases. As a result, customs and excise and 23.7 percent of the capital budget were collection were most affected by the pandemic, spent (Figure 29). Aggregate budget execution with revenue contracting by 11 and 15 percent, was thus 3 percentage points lower than over respectively, in May 2020 compared to the previous the same period in FY2019. Drawbacks in the year. VAT collection also dropped by 6 percent procurement process and a tendency to delay in May, whereas income tax collection continued initiating contracts until late in the fiscal year have growing, albeit at a significantly slower pace than continued to contribute to underspending. As has in previous months and from a comparatively been the practice in the past, the GoN adjusted small base. In contrast to tax revenues, non-tax to the persistent underspending by revising the revenue collection from March to May 2020 was July 2020 World Bank Group 15 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Box 3. Tax enhancement measures introduced prior to COVID-19 The government implemented various tax enhancement measures between July and March FY2020. These included (a) mandatory requirement of a Permanent Account Number for all salaried workers and all wage workers in the private sector whose daily wage exceeds NPR 2000; (b) the requirement that fully or partially owned government agencies or organizations/corporations deposit 50 percent of their value added tax in the name of suppliers/contractors, supplying goods and services, with the amount to be deducted when making payments to suppliers; (c) introduction of an internet-based vehicle and consignment tracking system for transporters and truckers; (d) an increase in visa fees for foreigners from July 17, 2019, requiring foreigners with tourist visas to pay US$5 to US$25 more and those on business visas to pay up to US$200 more; (e) an increase in the infrastructure development tax on petroleum products by NPR 5 per liter to NPR 10 per liter to minimize the border price differences; (f) revision in the customs duty for imports of some goods, under which the government raised the customs duty on imported gold and silver to prevent the arbitrage opportunities arising from the price differentials on these goods between Nepal and India. The government also increased the customs duty on sanitary ware and parts thereof, of iron or steel, and coffee-related goods. However, the government reduced the customs duties on raw materials used in paints and in poultry farming to promote those industries; (g) reduction in the capital gains tax rates for individual stock investors and real estate businesses (to 5 percent from 7.5 percent) and an increase in the income tax slab for individuals and married couples by NPR 50,000 to NPR 400,000 and NPR 450,000, respectively; and (h) removal of the VAT exemption on wheat and meslin flour and on the transportation of all goods. There were also changes in indirect taxes in FY2020 to promote import-substituting and export- oriented industries. These include increased import duties for some agro-based and industrial products (for example, eggs, tea, chicken meat, coffee, dairy products, biscuits, chocolates, noodles, potato chips, fruit juice, mineral water, sugar, footwear, zinc sheets, and tents); a 1 percent import duty levied on equipment, machinery, and chemicals used in the textile, thread, tea, basic medicine, sanitary pad, and feed supplement industries; reduction in the customs rate for imports of some industrial raw materials so that the rate is at least one level below the customs rate for the import of finished goods; customs duties exemption on exports of goods except alcohol and tobacco-based products, raw materials to be consumed domestically, and basic agricultural products; and bonded warehouse facilities for imports of all types of raw materials for industries whose exports exceed 20 percent of their production. be consumed domestically, and basic agricultural products; and bonded warehouse facilities for imports of all types of raw materials for industries whose exports exceed 20 percent of their production. 18.3 percent higher than over the same period the execute its capital budget, with the total budget previous year, boosted by interest and dividend execution rate remaining at 50.3 percent in May receipts from service-oriented institutions, 2020. As a result of these factors, expenditure including financial institutions. between March and May 2020 was 13 percent lower than a year before, with recurrent and capital 25. To address the revenue shortfall, the GoN spending contributing 0.1 and 12.9 percentage adjusted expenditure downward. Faced with points, respectively, to the decline. low government revenue and increased spending required for COVID-19 relief, the government 26. While the crisis associated with COVID-19 halted spending under 14 different categories has elevated the fiscal deficit, Nepal’s debt effective from April 2, 2020. In addition, following levels remain moderate. Nepal’s fiscal deficit is the national lockdown, the GoN was unable to estimated at 7.3 percent of GDP for FY2020. This July 2020 World Bank Group 16 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Figure 29. The challenge of underspending continued at all levels of government Sources: MoF and World Bank staff calculations. Note: The underspending relates to the eight months of FY2020 for the federal government and six months of FY2020 for provincial and local governments. would elevate aggregate public debt to 38 percent budget execution rates were 20 percent, 0.6 of GDP, 36 percent higher than the previous year. percent, and 43.8 percent, respectively, indicating About 57 percent of all public debt is external and a large variation in budget execution across local primarily concessional. The remainder, accounting governments. This was primarily due to variations, for approximately 16 percent of GDP, is domestic and more broadly, limitations in technical capacity debt and is denominated in Nepalese rupees. of existing staff and delays in the hiring of new staff at the subnational levels. Between July and 27. Subnational governments expanded January FY2020, average revenue collection across their expenditure and revenue collection, all local governments was 43.4 percent of the but levels of budget under-execution remain target. As with the budget execution, there is a wide large. Expenditure undertaken by provincial variation in revenue collection and achievement of governments from July to January of FY2020 was fiscal targets in the first half of FY2020. more than 300 percent higher than in the same period in FY2019, reflecting the low base of the previous year and driven mainly by increased capital spending. Underspending did, however, remain high. During the first half of FY2020, only 19.1 percent of the total budget (19.1 percent of the recurrent budget, and 19.2 percent of the capital budget) of provincial governments was spent. While budget execution is thus higher than the 5.5 percent achieved in FY2019, budget execution remained significantly below target. At the local level, only 19.7 percent of the total budget, 28.5 percent of the recurrent budget, and 9.8 percent of the capital budget were spent during the first half of FY2020 (Figure 29). Of the 682 (out of 753) local governments for which actual spending data for the first half of FY2020 was available, the median, minimum, and maximum July 2020 World Bank Group 17 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update B. Outlook, Risks, and Challenges The Outlook 28. The rapid evolution of the global be necessary. To account for this uncertainty, pandemic makes the outlook more uncertain this section discusses the economic outlook in than usual. Projecting macroeconomic and fiscal two scenarios: (a) a baseline scenario, discussed variables is fraught with uncertainty in normal in the outlook section, which assumes a gradual times. During these times, however, uncertainty resolution of the crisis during FY2021; and (b) a is compounded by the unprecedented nature of downside scenario, discussed in the risks section, the COVID-19 pandemic. Nepal’s near-term in which a second phase of a lockdown becomes economic future depends heavily on factors which necessary later in FY2021. are currently unknown and largely outside of its control. For instance, a complete resumption 29. Under the baseline scenario, growth is of tourism will most likely occur once a vaccine projected to increase slightly to 2.1 percent in is available and has been commercially deployed FY2021 (Table 1). This projection assumes that the globally, but the timing of when this will happen infection incidence curve begins to flatten during remains unclear. Similarly, many characteristics of the year, and the government continues current the virus remain unknown, and will likely dictate measures to ease up on the lockdown. Growth in the extent to which prolonged lockdowns will agriculture in FY2021 is projected at 2.2 percent, July 2020 World Bank Group 18 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update slightly below the FY2020 growth rate due to an 30. Inflation is expected to remain around 7 expected shortage of chemical fertilizers following percent. Inflation during FY2021 is expected to trade restrictions during the crisis and despite remain elevated at around 7 percent, reflecting a favorable monsoon projections for the 2020 slowdown in agricultural growth due to COVID-19 southwest monsoon season. Industrial production and its impact on food prices. Depressed firm growth is expected to accelerate marginally but profits following widespread closures pose remain subdued at 3.9 percent in FY2021, with vulnerabilities and risks to the financial sector (as a potential boost provided by the addition of this will affect the ability to pay back loans), which the Upper Tamakoshi Hydroelectric Project and could put upward pressure on inflation. other key hydropower projects to the grid, and associated improvements in electricity supply. 31. With a deceleration in imports, the Continued social distancing measures, localized current account deficit is projected to narrow. lockdowns, the suspension of tourism and an Imports are expected to remain subdued given expected continued slow growth of remittances the strain on economic activity and continued are also projected to weigh on service growth and low oil prices. While some smaller rebound in private consumption, which are projected to grow trade and remittances could occur in FY2021 if at 1.5 and 0.7 percent in FY2021, respectively. restrictions on movement and social interactions Government consumption (federal, provincial, are eased, they are still likely to remain below and local) is expected to expand by 8.4 percent pre-COVID-19 levels. With imports projected to through increased spending to mitigate the effects decline significantly more than remittances, and of COVID-19. the latter projected at around 18 percent of GDP Table 1. Macroeconomic projections of selected key indicators for the baseline scenario Baseline Downside FY17 FY18 FY19 FY20f FY21f 2020f 2021f Real GDP growth, at constant market prices 8.2 6.7 7.0 1.8 2.1 0.5 -2.8 Private Consumption 2.6 3.3 5.5 -1.6 0.7 -2.9 -2.3 Government Consumption 10.5 13.5 7.8 8.6 8.4 5.9 5.7 Gross Fixed Capital Investment 44.3 18.1 5.0 -23.2 -5.9 -37.8 -14.7 Exports, Goods and Services 11.3 6.2 4.7 -18.6 -6.9 -25.6 -15.9 Imports, Goods and Services 27.2 16.5 7.8 -16.6 -3.4 -25.5 -6.9 Real GDP growth, at constant factor prices 7.7 6.1 6.6 1.8 2.1 0.5 -2.8 Agriculture 5.2 2.8 5.1 2.6 2.2 2.1 0.9 Industry 12.4 9.6 7.7 3.2 3.9 1.3 -2.7 Services 8.1 7.2 7.3 1.0 1.5 -0.6 -5.0 Inflation (Consumer Price Index) 4.5 4.2 4.6 6.6 6.7 6.7 6.9 Current Account Balance (% of GDP) -0.4 -8.1 -7.7 -7.2 -6.5 -6.9 -6.3 Fiscal Balance (% of GDP) -3.1 -6.6 -2.6 -7.3 -6.6 -9.0 -11.5 Debt (% of GDP) 26.1 30.1 30.1 37.9 43.5 39.9 51.3 Primary Balance (% of GDP) -2.7 -6.1 -2.0 -6.3 -5.5 -8.1 -10.2 Source: World Bank, Macroeconomics, Trade & Investment Global Practice. Note: f = forecast. July 2020 World Bank Group 19 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update in the medium term, the current account deficit Risks and challenges is projected to narrow slightly to 6.5 percent of GDP in FY2021. This will be financed primarily 34. The main downside risk pertains by long-term borrowing and a drawdown of to a protracted pandemic leading to a international reserves, which are expected to cover reintroduction of the national lockdown. The close to six months of imports in FY2021. current outlook is predicated on the assumption that the COVID-19 pandemic will begin to 32. The fiscal deficit is expected to remain subside during FY2021, with localized lockdowns elevated in FY2021 because of increased in specific areas, when needed. This outlook is, government spending. Under the baseline however, subject to significant uncertainty. As of scenario, which assumes a gradual reopening of early-July 2020, the COVID-19 epidemiological the economy, revenues are expected to improve, curve was still increasing, fueled partially by a aided by the measures proposed in the FY2021 continued inflow of Nepalese migrants through budget. These measures include, for example, an the open Nepal-India border. Recent indications increase in customs duties on select products, show the number of daily cases may be declining. which are expected to offset the revenue impact of (Figure 30 and 31). This infection rate is expected tax relief measures for the sectors most affected to flatten during the year. However, should there by COVID-19. Government expenditures on be a second resurgence in the infection rate and relief and recovery efforts in FY2021 are expected fatalities, the impact on the economy could be to keep spending levels elevated. As a result, the substantial. In this case, the downside scenario is fiscal deficit is projected to slightly narrow from that growth in FY2021 could contract by as much 7.3 percent of GDP in FY2020 to 6.6 percent in as 2.8 percent, with contractions experienced FY2021. across the board in all sectors (Table 1). Moreover, given the large share of the informal sector, the 33. The projected increase in the fiscal deficit heavy reliance on subsistence agriculture, and the is likely to raise debt levels. Total public debt underdeveloped health system, a sharp slowdown is expected to reach 43.5 percent of GDP in in economic activity could exacerbate poverty, FY2021, with all indicators projected to remain inequality, and food security. below their policy-dependent indicative thresholds (including under the most extreme shock scenario). Figure 30. The epidemiological curve shows that Stress tests show a vulnerability to growth and the daily number of new COVID-19 cases reached export shocks and natural disasters, underscoring a high of 740 on July 3, 2020… the importance of implementing sound macroeconomic policies, including structural reforms in support of productivity-led growth and improved spending efficiency. There will be increased emphasis on mobilizing concessional financing from development partners. Nepal will also benefit from the Group of 20 Debt Service Suspension Initiative (DSSI) under which external debt service of approximately US$15 million in FY2020 and US$15 million in FY2021 (due between May and December 2020) are likely to be deferred. Sources: Health Emergency Operation Center (GoN) and World Bank staff calculations. July 2020 World Bank Group 20 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update 35. A second risk relates to continued revenue shortfalls. The FY2021 budget proposes expenditure containment measures to reduce the fiscal impact of a continued shortfall in revenue, including cuts to administrative expenditure and recurrent grants. However, additional measures might become necessary to reduce the pressure on spending arising from the pandemic. These measures could potentially include improvements in the efficiency and effectiveness of spending and improvements in public investment management. Figure 31. …as there is an increasing inflow of Nepalese migrant workers from India through the open border Sources: Health Emergency Operation Center (GoN) and World Bank staff calculations. 36. Finally, establishing adequate economic, social, and health relief measures will be crucial. As noted previously, the government has adopted some immediate economic support measures to mitigate the impact of the crisis. However, a more systematic approach that incorporates a medium- to long-term view with the aim of strengthening resilience of the economy is needed. The focus on resilience will require measures that consider Nepal’s vulnerability to climate shocks and that promote green and inclusive growth to ensure sustainability. This edition of the Special Focus outlines the key elements of a strategic approach to transition the economy from the relief stage through to restructuring and resilience. July 2020 World Bank Group 21 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update C. Special Focus – Post-Pandemic Nepal – Charting a Resilient Recovery, and Future Growth Directions 37. The global outbreak of COVID-19 has adverse effects on financial markets. Consequently, taken a heavy human toll, pushed economies global growth is projected to contract by 5.2 into recession, and increased the risks of a percent in 2020 and global poverty is projected to financial crisis. As of July 17, 2020, there were increase for the first time in 20 years2. over 14 million confirmed cases worldwide, of which around 600,000 have died1. To contain 38. The COVID-19 pandemic presents policy the outbreak and limit community transmission, makers with unprecedented challenges that countries have adopted social distancing and go beyond managing the immediate impact lockdown measures. The resulting shutdown of of the crisis. Charting a policy response to the business activity, travel restrictions, and border crisis requires a two-pronged strategy. First, it closures have caused a collapse in commodity involves addressing the medical component of the prices, a contraction in economic activity, and pandemic through testing, treatment, and advanced 1 World Health Organization COVID-19 Dashboard, https://covid19.who.int/; Johns Hopkins Corona Virus Resource Center, https:// coronavirus.jhu.edu/ 2 As measured by the international poverty line of US$1.90 a day and cited in the blog of Mahler et al. (2020). July 2020 World Bank Group 22 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update planning for future disease outbreaks. Second, 39. This special focus proposes a framework it also involves an adjustment to economic and and reform areas to support economic fiscal policy, as COVID-19 is likely to bring about recovery and sustainable growth in a post- behavioral changes that can significantly alter the pandemic world. The section first outlines global way economies operate. International experience trends that provide an indication of the deep- shows that planning ahead and charting such a rooted changes that the COVID-19 pandemic policy response early can help contain the crisis could potentially bring about in economies around and maintain economic activity. The Republic of the world. It then lays out the current status of the Korea, for instance, was able to draw on lessons crisis and the lockdown in Nepal and then presents it learned during the Middle Eastern Respiratory a framework with potential areas of reform that Syndrome (MERS)3 outbreak to address the can support Nepal’s recovery in the next few years. current crisis (see Box 4). Other countries that The framework includes three stages of policy have handled the pandemic well include New responses – relief, restructuring, and resilience – Zealand and Germany, both of which have and is organized under the four pillars of health, implemented measures similar to Korea. As Nepal social, economic, and long-term priorities. is still at a comparatively early stage in the crisis, it can draw from other countries’ experiences to develop a growth strategy that encompasses a medical response and accounts for the expected changes to the country’s growth model as part of the pandemic. Box 4: Lessons from South Korea in Containing the Pandemic Based on data and analysis from its experience with the Middle Eastern Respiratory Syndrome (MERS), the Republic of Korea was able to devise a strategy and plan for dealing with the current COVID-19 pandemic. The lack of data on the path of infection for the Middle East respiratory syndrome (MERS) virus led to high infection rates. Drawing on this lesson, Korea took action in the very early phases of the pandemic (with just 30 confirmed COVID-19 infections), to engage biotech companies in developing a test kit for the virus. Thousands of kits were made available, enabling doctors to test potential cases. Also, the authorities implemented a well-planned contact tracing protocol involving systematic and quick tracing of everyone who had come in contact with an infected patient. Legislation was also passed to allow the government to collect data on a patient and from security footage during an outbreak. Movements of patients are logged and shared (without identifying the infected individual) so that people are alerted to stay away from the path of infection. Text messages are also broadcast to the public to publicize localities where there is an outbreak or to let people know when they have crossed paths with an infected individual. This approach enabled Korea to test more people than any other country at the outset of the pandemic and to quickly flatten its disease incidence curve. It also enabled the country to circumvent the need for drastic containment measures. Nepal could also draw from its experience using anonymized cell phone data to track the movement of people during the 2015 earthquake. Cell phone data along with other methods of rapid assessment could be used to collect real-time data to monitor COVID-19 effects and the movement of infected people. This could be complemented with a strategy for contact tracing in the Nepalese context. It might also be necessary to enact a law that would allow the use of anonymized cell phone data during national disasters or similar pandemic outbreaks in the future. Analysis of these data would then inform development of a tailored response to the pandemic in Nepal. It would also be important to have ongoing and open communication with the public and with local authorities on the progression of infections and the most affected localities. Sources: Vox Media 2020; University of Southampton 2015. 3 Vox Media 2020. July 2020 World Bank Group 23 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update C.1. Emerging Indications of the approach to the sector and this may mean greater Economic Changes induced by attention to health considerations and to eco- or COVID-19 health tourism. Some countries are forming travel bubbles to enable the resumption of tourism 40. The design and implementation of a with associated measures to improve hygiene and strategy to contain the crisis and strengthen sanitation, increase the availability of hospital beds, economic activity would need to account for and strengthen contact tracing. In addition, travel a post-COVID world that operates differently restrictions are also likely to limit outmigration from before. There are several debates on of workers, which places an increased emphasis emerging global trends that could affect the design on facilitating domestic growth and employment of a strategy to support economic recovery. generation. Among these, five trends are likely to be influential for Nepal’s post-pandemic growth model. First, 42. Theme 2 – Increased Inequality and a global backlash against globalization has been Vulnerability: Economic contraction in amplified by the pandemic, which can further several countries is likely to increase poverty reinforce the global trend toward inward-oriented and inequality, necessitating improvements trade policies and import substitution efforts, and in social assistance programs. Many people in complicate international mobility of workers. economies across the world (including in industrial Second, global lockdowns and persistent remote countries) have little to no savings, with no working is likely to accelerate the digitization of employment protection or safety nets. In addition, workplaces, public services, and supply chains. many developing countries have large shares of Third, the crisis has shone a new spotlight on informal workers who have limited protection increased vulnerability and inequality and has and weak capacity to deal with shocks. There is a highlighted the need to transition to a more growing body of evidence that COVID-19 and the equitable and socially inclusive growth model. associated lockdowns have affected these workers Fourth, the crisis has emphasized the vulnerabilities more severely and have contributed to a rise in of economies to large shocks. With substantial poverty and inequality. This has sparked renewed risks from climate change looming, COVID-19 interest in the development of social protection is likely to put a larger emphasis on a greener nets, which will be crucial to maintain an inclusive and more sustainable growth model. Finally, the growth model during and after the pandemic. response to the crisis has led to an accumulation of debt in the public and private sector, which 43. Theme 3 – Digitization: The global needs to be managed carefully. economy is likely to be much more digitally oriented, and the current pandemic will 41. Theme 1 – Inward Orientation: Persistent speed up and reinforce that trend4. Business travel restrictions risk accelerating an and social interactions have had to take place increasing inward orientation of policy, virtually during the lockdown, increasing demand complicating the global movement of goods for online conferencing. Those firms that can and people. This trend is likely to affect multiple engage customers through digital interactions economic sectors. For one, ongoing or periodic or e-commerce have generally thrived. Many travel restrictions and social distancing will affect educational institutions have also provided online how the tourism and hospitality sectors operate for learning to students. Also, governments with well- the foreseeable future or at least until a vaccine or established digital services have been better able to cure has been found and widely applied. Countries provide services to citizens during the lockdown. that rely heavily on tourism will need to rethink the Once the pandemic is past, much of the increase 4 The Economist 2020. July 2020 World Bank Group 24 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update in digital services will likely remain, with more depressed in the short to medium term. trade in services and goods expected to go digital. Most likely, new value chains will emerge with the C.2. Socioeconomic Impact of the Crisis expansion of digital services and the focus on in Nepal domestic and regional supply chains. 46. In Nepal, the pandemic has recently 44. Theme 4 – Green Growth: COVID-19 escalated, with a sharp increase in the number has showcased the vulnerability of economies of cases in June 2020. The first COVID-19 case across the globe to unforeseen shocks and has was confirmed on January 23, 20205. By March 23, put disaster mitigation and adaptation on the top there were only two cases and social distancing was of policy makers’ agendas. After the pandemic, imposed, with a shutdown of border entry points the focus is likely to shift to adverse economic to India and China on March 23 and national consequences associated with climate change lockdowns from March 24, 2020. International and can accelerate the adoption of green growth flights and long-haul buses were also shut down strategies. A transition to green growth requires around the same time. All public and private actions to reduce pollution and emissions (for services (except for essential services as defined example, air, water, and soil pollutants) through in the Essential Services Operations Act, 2014) cleaner consumption and production patterns. were closed down. An NPR 500 million fund was This will help manage natural capital (for example, established for the treatment of COVID-19 cases, land, forests, and water) more sustainably and including quarantine areas and space set aside in key efficiently, and reduce vulnerabilities to climate hospitals for treatment of cases. These measures and disaster risks (for example, flooding, storms, helped keep the number of cases low until April. and warming temperatures). However, the number of confirmed cases began escalating in early May 2020. As of July 17, 17,344 45. Theme 5 – Debt: Leverage is likely to COVID-19 cases have been confirmed, with 39 increase across the board and interest rates are deaths and 11,249 recoveries6. likely to remain low in the foreseeable future. To keep an economic depression at bay and prop 47. The pandemic, coupled with government up supply, policy makers will opt for keeping lockdowns and travel restrictions, has interest rates low. Leverage is likely to increase impacted livelihoods in Nepal. As discussed across the board for households, corporates, in part A, the economic consequences of the and the government. Since the government is pandemic and the lockdown have been severe, the “lender of last resort” and must protect lives with immediate impacts on peoples’ livelihoods. and livelihoods, a significant increase in public Across all sectors, informal workers or those debt levels is anticipated. This in turn is expected without social security or assistance will be most to result in higher taxes in the future, to raise vulnerable to falling into extreme poverty. Within revenues to pay down the debt. Therefore, tax this group, informal sector workers and self- policy and administration reforms will be crucial employed households in urban areas may be more in the future, coupled with structural reforms to vulnerable than rural households that can fall back support growth. In the case of firms, higher debt on subsistence farming. could result in a debt overhang, limiting growth prospects. This might necessitate equity infusions 48. As a result of the loss of livelihoods, in firms to ensure that they remain viable. Reduced poverty and vulnerability in Nepal are income and increased indebtedness of households expected to rise. An estimated 31.2 percent is, however, likely to keep private demand of the population live close to the poverty line 5 The first case was a student who had just returned from Wuhan, China. 6 Ministry of Health and Population; https://heoc.mohp.gov.np/ or https://covid19.mohp.gov.np/. July 2020 World Bank Group 25 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update (earning between US$1.90 a day and US$3.20 a 50. Reduced household earnings may also day) and are at high risk of falling into extreme lead to unsustainable extraction of natural poverty. At an international poverty line of assets as a coping mechanism, which will US$1.90 a day, poverty is estimated at 8 percent of erode the natural capital base and undermine the population in 2019, and at the higher poverty efforts to sustain green growth. The widespread line of US$3.20 a day, the poverty rate is estimated loss of livelihoods coupled with the return of at 39 percent. Workers in the informal sector, migrant workers has made rural residents more including household enterprises and the self- reliant on natural resources as a coping strategy. employed, have been among the most affected COVID-19 will most likely increase the risk by the lockdown. Informal businesses make up of unsustainable practices. In some cases, this around 50 percent of enterprises in Nepal and are increased reliance on natural resources to earn a the main source of income for most of the labor living is done in a way that compromises the future force. Supply chain and demand disruptions put productivity of forests and ecosystem services for the earnings of workers, household enterprises, tourism and agriculture. Prior to COVID-,19, there and the self-employed in the informal sector at risk. were already reports of unsustainable extraction This risk jeopardizes existing businesses as well as of forest products, poaching, fire setting and the owners of these businesses, along with their illegal tree felling in various forest areas, including families. Most informal firms operate with limited those managed by local communities7. There have savings, and owners may face the difficult choice also been reports of encroachment into protected of staying home and facing starvation during the areas and illegal hunting of wildlife. The pandemic lockdown or running their business and risking is likely to increase these coping mechanisms, infection. These scenarios accentuate financial undermining the recovery and resilience of nature- difficulties as well as the spread of COVID-19. based tourism. 49. Increased vulnerability and the risk of 51. In response to the above disruptions, the falling into poverty mean households are likely government has adopted non-pharmaceutical to engage in depletive coping strategies. These and economic support measures (Table 2). Non- strategies include reduced consumption, foregoing pharmaceutical measures include lockdowns and health care, selling productive assets, engaging in social distancing. In addition, Nepal has established early marriages, or pulling children out of school. quarantine facilities and has imported needed A recent rapid assessment shows that the burden tests, drugs, and protective gear. The government on unpaid care work has increased for women has also stepped up public campaigns advising the who are tasked with looking after children and population on safety measures including measures the elderly in the household. Victims of domestic to improve hygiene. Economic support measures violence are also forced to quarantine with their have focused broadly on increasing liquidity in the abusers. This effectively isolates the victims, financial sector and easing reserve and prudential making it difficult to get assistance, and puts requirements to provide low-interest loans to them in immense danger – physically, mentally, firms. Other support to firms has included debt and emotionally. As the number of returnees deferments, extension of repayment periods, increase and domestic unemployment rises, this is and lower interest rates, particularly for the most likely to compound the impact of COVID-19 on affected sectors. For both firms and households, household welfare. support measures have included subsidies and deferment of utility bills 7 World Bank 2019. July 2020 World Bank Group 26 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table 2. Economic support measures – including monetary, financial, and fiscal measures Monetary and Financial Sector Measures Support Measures for Households and Firms • Reduced cash reserve ratio from 4 to 3 percent and reduced the • Deferred payment to mid-May of utility bills incurred interest rate on the standing liquidity facility rate from 6 to 5 percent between mid-February and mid-April • Revoked requirement for banks to build up the 2 percent • Discounted internet fees during the lockdown countercyclical capital buffer provisions in the Capital Adequacy • Reduced duties on imports of medical equipment Framework by July 2020 • One-month waiver by private schools on all fees • NRB temporarily relaxed reporting norms; bank and financial (except boarding fees) institutions will not be charged or penalized for noncompliance with • Extend deadline for VAT and income tax payment to regulatory and supervisory requirements in April mid-May • The Refinance Fund has been increased to provide subsidized • Tax deduction for contributing to the Corona Relief funding for banks to lend at concessional rates to priority sectors, Fund including the SMEs affected by the pandemic • Expand Prime Minister’s Employment Program to • NRB further announced at the end of April that banks will defer migrant laborers who can no longer go abroad loan repayments due in April and May until mid-July • Pay wages of workers in tourism industry between • For working capital loans, banks will extend the repayment schedule mid-March and mid-April through the welfare fund of the amount due during the lockdown for up to 60 days • Waive one month’s rent for unorganized informal • Businesses in affected sectors, if they can show need, qualify for labor additional working capital loans of up to 10 percent of the approved • Government contribution to the social security amount of their existing working capital loans, to be repaid within fund for tourism enterprises that have closed due to a year at most COVID-19 • Lower interest rates (of up to 2 percentage points) to be applied on • Broaden social assistance programs for workers in the bank loans from mid-April to mid-July for borrowers from affected informal sector sectors • Expansion of labor-intensive work programs with • Extension of the loan repayment period for sectors most affected strong emphasis on social inclusion by the pandemic (i.e., tourism, and for upgrading health facilities to contain the COVID-19 pandemic) • Priority refinancing for COVID-19-affected micro- and small enterprises and concessional loans to prospective migrants who are no longer able to migrate for employment due to COVID-19, but are willing to establish a domestic enterprise 52. Despite the recent pickup in infection means that most low-income countries will have to rates, the government has started easing up on reopen even if health concerns dictate otherwise. the lockdown8, given the high costs from lost In Nepal, an increase in these costs has resulted livelihoods. In addition to the loss of monetary in an easing of the lockdown. Going forward, income, these costs include psychosocial stress the government will need to adopt a strategy reflected in a higher incidence of gender-based of selective or localized lockdowns in highly violence, crime, and suicide. There are also costs infected areas. This should be complemented with associated with loss in access to health care9 and measures to maintain supply chains, employment, school closures, all of which could erode the gains and trade to minimize widespread destitution. in human capital. This could lower productivity and employment, increase inequality, and lead to 53. Nepal has adopted a phased approach to poorer health outcomes and social unrest10. These opening the economy and will need to take trends point to the higher costs of lockdowns for into account the heterogeneity in effects across low-income countries. The devastating impact on localities and regions. Employment opportunity livelihoods and well-being coupled with a weak costs of social distancing and lockdowns will likely social protection system and limited fiscal resources vary by province and locality, especially with the 8 Kharel 2020. 9 Poudel 2020. 10 Rogers and Sabarwal 2020. July 2020 World Bank Group 27 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update higher levels of infections observed along the invest and reform to promote more sustainable, border. Some sectors will be more amenable to inclusive, and resilient growth in a post-COVID continued social distancing and others less so, world. like tourism, hospitality, and restaurant sectors. The construction sector has been able to operate 55. A comprehensive strategy for Nepal can to some degree during the latter part of the focus on reforms in four areas. Priority areas lockdown and may be able to further scale up include (a) support for health interventions, (b) activity, with further rollback of the lockdown. In social response measures to reduce poverty and the agriculture sector, lockdowns have impeded inequality, (c) economic responses to promote the movement of farm produce and labor, green business growth and job creation in a more especially during March and April. By late May, inward-oriented and digitized Nepal, and (d) local governments had loosened the lockdown to cross-sectoral support to strengthen investments allow farmers to work their fields during the peak and maintain macroeconomic stability. planting season covering June to July. However, there are still reports of labor scarcity in certain 56. Policies will need to take into account localities11. spatial differences in the impact of the COVID-19 pandemic. The government is C.3. A Framework for Recovery and currently undertaking an assessment of the impact Resilience of the pandemic to inform the design of economic and social support measures and reforms. Given 54. Considering the adverse impacts and Nepal’s federal structure, the assessment captures structural changes that COVID-19 is likely to the provincial and local effects of COVID-19 impose on lives and livelihoods, Nepal needs including differences across urban and rural areas. a comprehensive strategy to inform policy For example, Provinces 2 and 5 have experienced making during and after the crisis. This section the largest rates of infection. In urban areas, proposes a policy strategy for Nepal with the population density, and informal settlements with objective of addressing the health impacts of the limited access to basic services (water, sanitation, crisis and initiating reforms that can help adjust and solid waste management) are likely to be at Nepal to a new normal shaped by the five emerging greater risk of infection, relative to rural areas. trends discussed previously: inward orientation, vulnerability, digitization, green growth, and 57. Implementation of such a strategy increased leverage. Such a strategy could be requires intergovernmental cooperation. phased over three stages: relief, restructuring, There would need to be strong links among the and resilience (Table 3). During the relief stage, ministries (particularly, health, social protection, the priority is addressing the immediate health education, and agriculture) and the provincial and impacts of the pandemic and providing support local levels engaged in frontline service delivery. In to livelihoods and firms to reduce vulnerability. general, the federal level (ministries and agencies) As the country brings the pandemic under control could be responsible for formulation of strategic and infection rates level off, the economy can visions, and formulation of plans and policies, reopen gradually, leading to the restructuring stage. and could also provide technical and financial The focus in this stage is on strengthening health resources to subnational levels. The provinces systems and adjusting to a new normal that could monitor the use of resources and provide prioritizes domestic employment generation in technical support for implementation by local a greener and more digital economy. The resilient governments. Designating the elected mayors recovery stage focuses on new opportunities to and provincial governors as key stakeholders 11 Sah 2020. July 2020 World Bank Group 28 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table 3. A Framework for Growth and Resilience WBG COVID- Stage 1: Relief Stage 2: Restructuring Stage 3: Resilient Recovery 19 Crisis Response Public Health Emergency Restructuring Health Systems Pandemic-ready Health Systems • Public health and hygiene campaign - • Strengthen engagement of the private sector • Include standard opera�ng procedures in handwashing, masks, social distance • Scale up immuniza�on programs emergency response plans for both Pillar 1: • Tes�ng, tracing and data collec�on on • Invest in telemedicine and improved emergency and maintaining essen�al Saving Lives pandemic management of medical waste service delivery • Water, sanita�on, hygiene Social Emergency Human Capital Building Equity and Inclusion Pillar 2: • Cash/in-kind (food) transfers for food • Labor-intensive public works for infrastructure • Adap�ve social protec�on Protecting the security investment • Develop e-services for distance learning Poor and • Expand exis�ng delivery systems for • Business development through grants or Vulnerable safety nets microcredit ins�tu�ons and banks (with • Scale-up the Prime Minister’s business skills training) Employment Program • Development of digital pla�orms for service delivery • Establish a social registry to target and coordinate services Economic Emergency Firm Restructuring & Debt Resolu�on Green Business Growth and Job Crea�on Pillar 3: • Liquidity support to firms • Public works programs for green growth and • Strengthen financial infrastructure to Sustainable • Debt payment deferment infrastructure develop e-commerce pla�orms and Business • Economic support targeted to most • Job matching and redeployment, and safe engage the private sector Growth and Job affected firms in a �me-bound manner, migra�on measure Creation with the objec�ve of maintaining • Engage returnee youth in agriculture produc�on employment and forest-based ac�vi�es, agribusiness-based • Target agriculture and tourism sectors and forest-based SMEs Pillar 4: Maintain Line of Sight to Long-term Policy and Ins�tu�onal Reforms Investments to Rebuild Be�er Strengthening Goals • Improve the business environment and • Developing digital infrastructure to Policies, Source: Adapted Institutions and from World • Fiscal Bank and strengthening (2020a). service delivery programs to promote digital literacy contain the spread of COVID-19 and ensure business con�nuity of the Investments for government and the private sector. Rebuilding • Generate, publish, and analyze to guide Better recovery efforts Macroeconomic Stability and Strong Fiscal Framework Data and Analysis Communica�ons, transparency, and trust in government and local level integrated with na�onal effort Bridging the Digital Divide in the development of recovery strategies is steps in that direction; aside from nationwide critical to ensure ownership and sustainability of lockdowns and social distancing, the government interventions. has adopted public campaigns to promote general hygiene. A next step could include testing, C.4. Charting Nepal’s transition from isolating, and treating the infected; tracing their Relief and Restructuring to a Resilient contacts; quarantining the exposed; and ensuring Recovery border health security. Preserving other key health services is also important to minimize the deaths from day-to-day disruptions in health Pillar 1: Health Measures care. For example, there are reports of disruption of services due to the lockdown, while others Relief Stage fear going to the hospital because of the risk of 58. The priority in addressing the crisis catching COVID-1912,13. The task of saving lives involves containing the spread of the therefore must extend well beyond stopping pandemic, safeguarding the health of the COVID-19 transmission to addressing the high population, and flattening the peak of the risk of spillover effects of the pandemic and disease incidence curve. Nepal has taken initial 12 Chhetri 2020. 13 Shrestha 2020. July 2020 World Bank Group 29 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update economic crisis on mortality due to other causes. health impacts. During this stage, greater use of telemedicine and proper management of health 59. To contain the disease and reduce infection care waste could also be explored, particularly and death rates, Nepal will need to build its from the policy and regulatory angle. Surveillance testing capacity and improve the process for and health reporting systems in the country could isolating the infected, treating them, and also be strengthened. In addition, guidelines for tracing their contacts. Quarantine facilities will health and safety could be developed to support need to be expanded and well-equipped, especially the opening of the economy and the operation with needed food and water. The government of the private sector. This will be particularly will need to be clear about which policies on important for socially oriented or entertainment essential health services should be maintained services and industries. and effectively communicate this both to service providers and health facilities and the population. 61. The government should also use this This may require drawing on ministerial staff to as an opportunity to strengthen federalism monitor the impact of the pandemic. A dedicated and service delivery at the local level. Local Ministry of Health and Population (MoHP) team governments are well positioned as first responders could be posted in each Province to monitor and and operate over 90 percent of public health report on essential service delivery. These reports facilities in Nepal. An effective vertical (federal- would supplement information systematically provincial-local) coordination mechanism could reported in the health management information be put in place that would enable the Ministry system (MIS). A well-developed health MIS of Health to mobilize local government health would include data from testing centers that are departments at short notice. This would reduce aggregated and managed by the health ministry, the need to have all swab tests for COVID-19 in in partnership with local governments. It could Kathmandu. It would support greater devolution also entail drawing on community organizations of service delivery including the responsibilities and groups, or cooperatives and civil society, to as envisioned in the Constitution, and could give monitor and collect information on the pandemic further impetus to federal government action on outbreak at the local level. This would require pending legislation and policy measures needed the provision of specific guidance to Provinces, to empower provincial and local governments to Palikas, and facilities for delivering essential perform their functional assignments. services during the COVID-19 outbreak, with a focus on vulnerable groups. Resilience Stage 62. To achieve a resilient recovery, the focus Restructuring Stage should be on pandemic preparedness and 60. During the restructuring stage, the developing and putting in place measures for emphasis needs to be on beefing up health maintaining essential health services during delivery systems and scaling up public health future shocks. Emergency health response plans priorities like immunization programs. Private should include standard operating procedures not sector participation in health service delivery for only for responding to the emergency but also for both COVID-19 and other health services in Nepal maintaining essential service delivery. A critical could help boost the capacity of the health system aspect of this will be the proper management of to deal with an increased number of patients. The health care waste to ensure public safety. New private sector could be engaged as service providers, service delivery modes such as telemedicine could suppliers of goods and services, and innovations be developed to help maintain essential services such as telemedicine, to help reboot the economy. as insurance against future shocks and for greater In addition, any immunization programs, which resilience. Engaging the private sector could help took a backseat because of the pandemic, would support government capacity to ensure safe access need to be resumed to avoid long-term adverse to health services. July 2020 World Bank Group 30 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update (predominantly private ones) have switched to Pillar 2: Social Measures online learning. However, poor and vulnerable children are at a disadvantage because of limited Relief Stage access to digital platforms and devices. These 63. Support to households is central to children, especially girls, with limited access to addressing the crisis. Income support to the media and digital learning platforms are at greatest poor and vulnerable, including those who have risk of experiencing a loss in learning or erosion lost their jobs during the lockdown and informal of their human capital. Distance learning may sector workers, will be critical to addressing the need to incorporate a broader approach, including threat of rising inequality and poverty following radio, TV, and SMS to ensure broader coverage the crisis. Income support will further facilitate of students. Additional training for teachers and and help shorten the transition to recovery by students may be required in basic to intermediate- preventing households from adopting negative level digital skills. In this context, connectivity for coping mechanisms such as cuts in education higher education institutions could be expanded spending, reducing food intake, sales of productive and the Emergency Education Operations assets, and accumulation of debt. Procedures adopted. 64. Nepal has adopted initial fiscal stimulus Restructuring Stage and relief measures in support of vulnerable 66. During the restructuring stage, continued households but will need to scale up social support to vulnerable households will be assistance and social protection programs. important, together with the establishment of The immediate relief is being provided by the a robust social registry. Labor-intensive public government through existing delivery systems works could be undertaken, which would help for social safety nets or through employment address small-scale infrastructure rehabilitation and programs. However, the existing programs do not maintenance needs while providing employment include many of those who have been adversely opportunities. To generate more employment, impacted by the crisis, especially the informal entrepreneurship support programs through sector workers and the migrant returnees. It will grants and/or through microcredit institutions and be important for the government to scale up these the banking system (together with business skills programs to include the newly vulnerable sections training) could support small and medium-sized of the population and provide cash or in-kind enterprises. A revision of migration policies would (food) transfers to prevent the depletion of human help increase safe and productive employment and physical assets. In addition to the existing for migrants. In addition to the above measures, safety nets, the Prime Minister’s Employment it would be critical to establish a robust digitized Program will be one of the key mechanisms for social registry to help identify beneficiaries and transfers to beneficiaries and will be scaled up to track and coordinate programs. This would be to cover the most vulnerable, including migrant further facilitated through implementation of an labor14. electronic payment platform for all government- to-persons transfers. 65. Alternative measures could be adopted and scaled up to ensure that children continue 67. To get children back to school full time, to learn during the lockdown and beyond. measures would need to focus on ways to All educational institutions have been closed reduce contact. This would involve staggered since March 2020. As a result, an estimated 8.2 shifts or alternate week schedules. The federal million children are out of school. Some schools government, in consultation with subnational 14 Existing channels will reach only about 4 million people and will need to be broadened to reach the majority of affected households. July 2020 World Bank Group 31 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update governments and teacher unions, is developing a school reopening framework to help guide the safe 69. Increased resilience in delivering reopening of schools and continued learning. The education services will entail developing and framework will provide guidance on enhanced delivering new e-services, particularly for the school sanitation and health protocols including most vulnerable, who may not have access to health screening and WASH facilities. This the internet. Remote learning modules for each framework will be disseminated to subnational grade/course, including manuals for teachers and governments and made publicly available. There students for distance learning and support for may be a need to adopt re-enrolment campaigns faculty members and students, would help ensure and incentives (through school feeding, provision that students do not miss out on their education. of uniforms/books) to get children back to school. In some countries, local governments or district Also, once back in school, an adjustment of the offices provide kiosks that can facilitate access, academic calendar may be required to make up for eliminating the need for intended beneficiaries the learning time lost. This may be supplemented to travel to urban centers to access services. with remedial programs. Vocational training could Nepal may consider adopting similar approaches be redirected to essential and priority sectors to by strengthening the connectivity of local and support economic recovery and employment. In provincial offices and building up related capacity higher education, tapping and extending the global of these units. educational resources through the Global National Research and Education Network15 (NREN) and Pillar 3: Economic Measures public private partnerships will be critical. Relief Stage Resilience Stage 70. In the relief stage, economic support 68. The key focus in this stage is on measures should focus on providing strengthening the resilience of the social immediate liquidity to the most affected protection systems to effectively address firms. The reduction in demand, disruption of future shocks. Shock preparedness will involve a distribution channels, tighter credit, and rising full deployment of the social registry to identify uncertainty have made working capital even more beneficiaries of all targeted programs and pre- scarce and increased the need for liquidity to identify those vulnerable to shocks. Measures reduce firm closures/bankruptcies and reduce the to strengthen the social protection system will number of layoffs. Government support should be include (a) implementation of the social security based on clear eligibility criteria and ideally tied to allowances as per the Social Security Act, (b) refining maintaining employment and meeting immediate the design of existing social protection programs operational needs. Subsidized emergency packages to enhance the impact on human capital, and (c) could be designed for eligible firms and need to promoting the inclusion of informal workers in be time bound. Nepal should continue with compulsory schemes (such as the Social Security ongoing economic measures including allowance Fund). Employment support for the unemployed for temporary social security, tax, rent, and utility could be promoted through (a) reskilling and deferrals; wage subsidies; and suspension of redeployment for those who lost their livelihoods import duties for essential inputs. To date, Nepal’s or jobs; (b) implementation of strong migration economic support to firms has included regulatory policies and programs, to ensure reliable and safe forbearance, refinance facilities, and the provision migration and reintegration of returnees; and (c) of subsidized loans. productive public works programs to support the poor and vulnerable. 15 Nepal is a member of the Global NREN network. July 2020 World Bank Group 32 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update 71. A particular focus on the tourism and that supports health safety. Continued support agriculture sectors may be warranted given to firms in the form of subsidized loans and the direct impact of COVID-19 on these loan restructuring might be needed. With higher two sectors, links between them, and their leverage, some critical but systemically important importance for growth and food security. firms might need equity infusions. However, Tourism accounts for close to 8 percent of jobs this support will need to be provided so as not and supports over 1 million jobs (directly and to distort markets and to ensure that only viable indirectly). The combined direct and indirect firms are saved. Those firms receiving support contribution of travel and tourism to Nepal’s should be critical to future growth and provide a GDP was US$2.2 billion (7.9 percent of GDP) in revenue stream to the government in the form of 2018, and the sector provided 6.7 percent of total future taxes. Streamlining and simplifying approval employment. In 2019, some 1.2 million tourists processes for investments will also support visited Nepal. An emergency financial support recovery. In addition, corporate and consumer package for the tourism sector could be elaborated, insolvency regimes could be strengthened and in close consultation with the private sector, out-of-court workout procedures introduced. to prevent job losses in this crucial sector for Nepal’s economy. Agriculture comprised around 73. Nepal can start leveraging the benefits 24 percent of GDP in FY2019 and employed 63 of increased digitization as part of the percent of the labor force16. Measures could be restructuring stage. Nepal is likely to face adopted to limit and regulate (instead of banning), an increasing domestic labor supply as travel high-density markets, which are a vital part of the restrictions and reduced global mobility constrain food chain, including spacing out markets and outmigration. To generate more domestic stalls where feasible to support physical distancing. employment, entrepreneurship support programs This would help farmers sell their produce while through grants and/or through microcredit also maintaining distribution to urban centers, institutions and the banking system (together with thus helping to guarantee food security. Direct business skills training) could support small and support to farmers, for example, through the medium-sized enterprises. A special focus can subsidized distribution of fertilizer, could also be be on making these enterprises fit for the future, an option. Also important for food security will be for instance, by providing them with the skills the establishment of community grain stores and to leverage digital technologies. As such, further stronger engagement of the private sector in the investments and reforms to expand the reach and distribution of fertilizer. coverage of mobile banking and digital financial services, use of non-collateral-based lending, Restructuring Stage and support to business development and skills 72. During the restructuring stage, firms will upgrading could help support recovery of firms in need continued support while steps toward the informal sector. Programs to promote digital reopening businesses can be taken. This may literacy or subsidies for purchasing cell phones entail a staggered and selective reopening of or laptops, or establishment of information businesses based on the type of industry and the technology (IT) centers to facilitate access to the ability to maintain social distancing, as well as the internet and computers are some of the potential degree of strategic importance of any related measures that could help increase overall firm businesses and industries. Some standards and growth and employment. guidelines may need to be communicated to guide businesses and the population on business conduct 16 This includes those engaged in subsistence agricultural (see World Bank Jobs Diagnostic; http://datatopics.worldbank.org/ JobsDiagnostics/). July 2020 World Bank Group 33 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update 74. Nepal can also start promoting green of-court procedures could help further facilitate businesses during the restructuring stage. private sector engagement. Fiscal incentives could be provided to enterprises for green investments, including enhancing 76. Support to firms could focus on green energy efficiency, hygiene and sanitation, waste growth, especially in the tourism and forestry management, and the adoption of cleaner sectors. The pandemic might lead to a permanent technologies. The promotion of agro- and change in how international tourism operates. forest-based SMEs would include startups and There may be more emphasis on environmental modernization of supply chains. This will require management (waste management, air quality, support to local-level planning and implementation water quality) investments at tourism destinations of activities to increase agriculture and forest and health safety. Guidelines and protocols would production and marketing. It will also require need to be developed along these lines. Effective the appropriate financial products for agri- and communication and marketing of this reorientation forest-based businesses. Existing forestry-based would be important in selling this new approach to enterprises could improve their capacity to further potential tourists. In addition, government could process and add value to forest-based products and use the pandemic as an opportunity to refocus substitute for market supplies currently covered the tourism sector to ecotourism and establish through imports. This could engage returnee youth certification schemes to facilitate compliance and contribute to new job opportunities for skilled with the guidelines. This could include acquiring and non-skilled labor. To control activities such as international accreditations and standardization. In poaching and illegal tree felling, local communities addition, new investment opportunities for green could be given the resources and training to jobs in the forestry sector could be developed. monitor these activities through increased patrols, New forest-based SMEs related to both timber and work with local authorities to address these and non-timber production could be incentivized threats. and developed. Offering an affordable credit line for forest-based activities and lifting policy barriers Resilience Stage for establishing enterprises would help develop 75. In the resilience stage, measures should a modern and competitive forest-based private be adopted to strengthen the physical, digital, sector. and financial infrastructure to support firms. For informal sector enterprises, and the self- Pillar 4: Cross-cutting Measures employed, reforms should aim at increasing access to finance, including measures to promote digital Relief Stage financial services, mobile banking, and digital 77. During the relief stage, an accommodative literacy for greater resilience. To strengthen the monetary and expansionary fiscal policy is financial infrastructure, the government should needed to support liquidity and provide relief enact the “Secured Transactions” legislation and to households and firms. Fiscal measures would introduce new forms of credit collateralization, focus on increased allocation to health, social including factoring or reverse factoring, which is protection, and employment programs, some of key to maintaining viable supply chains. This should which have been implemented by the government. enable diversification of the types of permissible The government has also reduced import duties collateral beyond those that are fixed to those that on essential medical supplies, a welcome measure. include cash-flow and other forms of “moveable In addition, tax deferrals have been provided to collateral.” This could be complemented with key firms and households to help them deal with investment climate reforms, including investments reduced incomes. Government assistance might in physical infrastructure, which impact FDI also be needed to keep some essential utilities like flows and firm entry and operation. More electricity and water functioning. Monetary policy comprehensive and long-term insolvency and out- has also been eased to provide increased liquidity July 2020 World Bank Group 34 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update to the banking system (Table 2). The central bank public utilities (for example, electricity networks, has introduced some forbearance measures to broadband backbones), including introduction of support firms. It will be important to keep these appropriate rules to manage conditions of access, extraordinary fiscal, financial, and monetary capacity allocation, and access pricing. To address support measures time bound to maintain congestion issues in selected areas, radio spectrum macroeconomic stability. With a shock to revenues could be temporarily assigned. and increased spending needs, the government will need to mobilize larger concessional resources Restructuring Stage from development partners. 80. Expansionary fiscal and monetary policy will likely continue during the restructuring 78. It will also be important to maintain phase but with increased emphasis on debt essential services, which depend to a large sustainability. Income and employment support extent on the subnational governments. On programs (through public works) will continue to essential services, it is critical to maintain water, require increased budget allocations to support sanitation, and hygiene services to enable proper the vulnerable. In this stage, an increased focus handwashing and for safeguarding health. Water will be on ensuring the macrofiscal sustainability and electricity will also be critical to keep hospitals of these measure by avoiding a buildup of debt. running at full capacity during the relief stage. Since This can be addressed through tax reforms and several households and firms have experienced an a focus on concessional financing. To increase income shock, it will be important to provide utility revenue collection, the government could payment deferrals and avoid disconnections due potentially consider options like a wealth tax and to nonpayment. Here again, it will be important to a carbon tax. There should also be a concerted keep these measures time bound to maintain the effort to avoid imposing trade restrictions. Efforts financial sustainability of these services in the long to maximize concessional resources will need to run. Also, local governments are well-positioned continue to ensure fiscal and debt sustainability in to deliver critical services, including health, and the aftermath of the crisis. The government could it will be important to coordinate across all three develop an updated debt management strategy levels of government to ensure uninterrupted and prepare plans on how it would wind down service delivery. some of the fiscal support measures in the future. Until the economy is back on a sustained growth 79. Removing barriers to internet access path, an accommodative monetary policy stance and digital infrastructure can facilitate will need to be maintained. the implementation of social distancing measures and ensure business continuity of 81. Following an expected buildup of private the government and the private sector. Less sector debt, it will be important to ensure a than 10 percent of households have internet stable and robust financial sector to support access (2017/18 Labor Force Survey), and the the economy through the restructuring phase. Demographic Health Survey (DHS) 2016 indicates Since the impact of the crisis on the financial that only 22 percent of females aged 15 to 49 used sector will come with a lag, it will be important the internet in the month preceding the DHS. to assess the nonperforming assets and take There is limited reach of high-quality connectivity measures to ensure sector-wide stability. The outside of Kathmandu and other large cities government could formalize this assessment in as only a third of all mobile users subscribe to the form of a financial recovery strategy. Measures mobile broadband services. Digitization is also should also be adopted to strengthen and scale up limited across the economy. To address these the Deposit and Credit Guarantee Fund (DCGF) challenges, it will be necessary to remove access to increase confidence in deposit insurance and restrictions to any underutilized fiber optic to share credit risks (and reduce the banking backbone managed by the governments and sector’s risk aversion). The government could also July 2020 World Bank Group 35 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update explore regulatory amendments to enable financial Resilience Stage institutions to offer digital financial products and 84. In this stage, it will be important to signal services tailored to the needs of households and a return to macroeconomic stability. On firms. the fiscal side, measures will be needed to raise revenues that have declined due to low economic 82. To enable digitization, reforms can activity and the lockdowns. These measures would focus on broadening internet access. Potential include reforms in tax policy and administration, measures include development of a regulatory including streamlining of import and export tax framework that enables sharing of telecom-ready regimes and reduction in tax expenditures. As infrastructure across sectors (for example, ducts, part of the transition to investment and growth, poles) and promotes competition, including it will be important to strengthen the public through measures to ensure nondiscriminatory investment program and prioritize growth and and cost-based access to networks of dominant green investments, as well as the development of operators. To hasten the expansion of broadband essential and green infrastructure. Government connectivity in rural areas in competitively policies should aim at strengthening the neutral ways, government should update the identification, prioritization, and implementation rules that govern universal service funds and process for investment projects, as well as the introduce other support schemes. This should be procurement framework. Medium- to long-term complemented with promotion of increased use fiscal sustainability would be supported by sound of and access to telecommunication and internet debt management, and this would be helped by systems to support the capacity for telework of adopting targets for fiscal consolidation and debt key public institutions, provision of e-health and reduction. With a subdued economic recovery, the Edutech services, and access to digital services in financial health of many public entities is likely to rural and remote areas, especially for low-income worsen. It will be important to monitor contingent households and SMEs. liabilities arising from systemically important firms and banks Ongoing monitoring of key economic 83. Impact assessment of the crisis on indicators should inform the timing of the fiscal essential service delivery could be undertaken consolidation process, given its trade-offs with during the restructuring stage, with continued growth, and changes in monetary policy. provision of these services. During this phase, the government could undertake an assessment 85. Maintaining financial sector stability and prepare a strategy to ensure financial viability will require enhanced liquidity, strengthened of essential service delivery, which would be macroprudential measures, and increased implemented gradually, COVID-19 permitting. supervision. The crisis is likely to have a It will also be important to undertake critical debilitating impact on the financial sector, and the repairs to the infrastructure and, where feasible, implementation of the financial recovery strategy public works programs could be prioritized in will be paramount. It will be important to have these sectors. Irrigation services will also need a robust regulatory and supervisory framework to be maintained to support agriculture and to ensure stability of the sector. The sector will food security. Some of the nonessential services require intensive monitoring, which will be could be resumed. Since service delivery is the facilitated by the implementation of the Credit responsibility of the subnational governments, it Information and Reporting Act and the amended will be important to resume the progress toward Secured Transactions Act. These acts would also federalism, with a special focus on capacity- help with expanding the basis for lending beyond building efforts. fixed collateral, making credit more accessible to a broader segment of the private sector. The central bank could also operationalize the Supervision Information System and the anti- July 2020 World Bank Group 36 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update money laundering and combating the financing of pollution control that provides health benefits; terrorism National Risk Assessment framework. and improved delivery of water and sanitation services, especially in rural areas. Nepal could draw 86. Pandemic preparedness for essential on its natural resources to develop labor-intensive services delivery and their financial green infrastructure such as terracing on slopes, sustainability will be critical. The pandemic afforestation and reforestation, slope stabilization, preparedness strategy will ensure uninterrupted and trail maintenance and rehabilitation in access to essential services delivery in times of protected areas. crisis. It could also include options to provide off- grid facilities to strategic locations when needed. 89. Other longer-term priorities also need With deferrals in utility payments and a subdued to be brought back to the table. These would economic recovery, the financial health of many include (a) supporting human capital accumulation, utilities is likely to worsen. It will be important to (b) improving the business and investment climate implement policies to restore their financial health while simultaneously orienting it more toward to avoid an increase in the fiscal burden. It will also the digital economy, (c) increasing infrastructure be important to fully restore nonessential services. investments to close the infrastructure gap and There is also a need to resume greater devolution raise the growth potential, and (d) continuing of service delivery to the local levels, as envisioned efforts to ensure environmental sustainability and in the Constitution. mitigate the risks from climate change. 87. Strengthening digital systems and 90. For all three stages, it will be helpful to connectivity will support service delivery and maintain a strong communication program private sector growth. To initiate a process of and collect data to inform policy making. As digital transformation, the government could adopt the economy moves from relief to restructuring increased digitization in service delivery, especially to resilience, communication updates will be for payment collections and usage records. With important to keep the public informed and to the increased emphasis on online learning, and gain their trust and confidence, and for continued digital or mobile banking, digital distribution of compliance with government rules and guidelines. social protection benefits will require improved This communication program will need a robust cybersecurity of essential government services. data system to monitor progress and inform the This would include building capacity and awareness design of the COVID-19 response program. on cybersecurity via an informational campaign It will be important to strengthen existing data for SMEs and individuals. Digital solutions for sources and collect new data. Data can come from e-health, Edutech, and other key services, and nontraditional sources such as phone records or for government to person (G2P), government to remittance transfer accounts or from rapid crisis government (G2G), and government to business monitoring mechanisms through surveys and (G2B) transactions, could help increase resilience geospatial data. Going forward, it will be important of the economy during future shocks. It will also to improve the regularity of data production, be important for the government to support sharing, and use (see Annex). digitization of firms through promotion of broadband internet access, development of their 91. The table below proposes actionable capabilities, and by facilitating digital payments. measures that the government can undertake. This crisis will require a multi-faceted response 88. Critical investments can help shape given the wide-ranging impact. These measures a green growth agenda. Key elements of will support the government’s efforts in providing green growth include sustainable and resilient relief and building a resilient recovery. infrastructure designed and built to minimize damage to the environment and natural resources; solid waste management and air and water July 2020 World Bank Group 37 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table 4. Priority actions/measures to move towards a resilient recovery Relief Restructuring Resilient Recovery • Ensure quarantine facilities • Scale-up public health • Adopt emergency response plans, are well-equipped and priorities like immunization including standard operating build testing capacity campaigns, and surveillance procedures for both emergencies and • Deliver specific guidance and reporting systems essential services. to Provinces, Palikas, and • Allow greater private sector • Strengthen operational procedures facilities for delivery of participation in COVID and for proper management of health essential health services non-COVID health service care waste Health during COVID-19 delivery • Implement new service delivery • Have a dedicated team at • Develop guidelines for health modes such as telemedicine to the Ministry of Health and and safety of the private sector increase resilience to shocks Population (MoHP) and in as the economy opens up • Strengthen local level health service each Province to monitor delivery mechanisms and report on essential service delivery • • Provide emergency • Continue to provide cash or • Fully deploy the social registry, to cash or in-kind transfers in-kind transfers to the poor ensure future shock-preparedness using existing delivery and vulnerable and deploy • Strengthen the social protection systems for social electronic payment systems system by implementing social safety nets or through • Support employment through security allowances, strengthening employment programs public works programs, the design of existing programs • • Expand coverage of revised migration policies and including informal workers in existing programs (such and entrepreneurship support contributory schemes as the Prime Ministers through banking and non- • Provide employment support by Employment Program) banking channels, together reskilling and redeploy those who lost • • Support distance with business skills training their livelihoods and adopting strong learning programs for • Establish a social registry, to migration policies all using TV, radio, SMS, help identify beneficiaries and • Strengthen the education system Social internet, printed materials coordinate programs to withstand further shocks by • Take steps to get children increasing connectivity, adopting the back to school including re- Emergency Education Operations enrolment campaigns and Procedures and developing and incentives together with delivering e-education services measures to maintain social through local government or district distance (staggered shifts, office kiosks alternate week schedules) and enhanced school sanitation and health protocols • Re-direct short-term vocational training to essential and priority sectors July 2020 World Bank Group 38 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table 4. Priority actions/measures to move towards a resilient recovery Relief Restructuring Resilient Recovery • Allow (temporarily) social • Provide matching or • For informal enterprises increase security, tax and rental/ conditional grants, loan access to finance, through digital utility deferrals, provide restructuring and equity financial services, mobile banking, wage subsidies, suspend infusion to firms, in a selective and digital literacy import duties for critical and time-bound manner • Implement the Credit Information supplies, and avoid the • Provide fiscal incentives for and Reporting Act and the amended impact on credit scores green investments, including Secured Transactions Act to expand • Announce a time bound enhancing energy efficiency, the basis for lending beyond fixed subsidized emergency hygiene and sanitation, waste collateral financial package for management, and the adoption • Adopt comprehensive and long- priority sectors like tourism of cleaner technologies term insolvency and out-of-court and agriculture. • Streamline and simplify procedures • Support Palikas in the approval processes for • Accelerate key investment climate distribution of relief investment reforms impacting foreign direct Economic packages (seeds and • Strengthen corporate and investment (FDI) flows and firm Support fertilizers) to affected consumer insolvency regimes entry and operation farmers and centrally and out-of-court settlement • Develop guidelines to support procure agriculture procedures environmental management (waste produce to respond to • Expand the reach and management, air quality, water quality) food security needs coverage of mobile banking investments at tourism destinations and digital financial services, and promote eco-tourism. and the use of non-collateral • Invest in food storage and distribution based lending infrastructure • Support programs to promote digital literacy and establish information technology centers to facilitate access to the internet and computers July 2020 World Bank Group 39 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Table 4. Priority actions/measures to move towards a resilient recovery Relief Restructuring Resilient Recovery • Increase the fiscal allocation • Continue with increased • Increase tax revenues through to health, social protection budget allocation for income reforms in tax policy and and employment programs and employment programs administration including streamlining • Mobilize concessional • Explore additional sources of the import and export tax regimes resources from revenue through wealth and and reducing tax expenditures development partners carbon taxes • Strengthen the public investment • Adopt monetary easing • Avoid imposing trade program and prioritize growth and to provide liquidity to the restrictions green investments as well as the banking system • Prepare a strategy to wind development of essential and green • Maintain the provision of down fiscal incentives and infrastructure essential services like water, strengthen debt management • Adopt targets for fiscal consolidation sanitation and hygiene and • Assess the impact of the crisis and debt reduction and monitor electricity through the local on the financial sector and contingent liabilities arising from governments prepare a financial recovery utilities and systemic firms and banks • Remove barriers to internet strategy • Implement the financial recovery access (access restrictions • Strengthen and scale up the strategy and strengthen the regulatory to under-utilized fiber- Deposit and Credit Guarantee and supervisory framework for the optic backbone) and Fund and explore regulatory banking system digital infrastructure to amendments to enable • Implement pandemic preparedness Cross-Cutting enable social distancing financial institutions to offer plans for essential service delivery, Priorities and maintain business digital financial products and restore the financial health of utilities, continuity services fully resume non-essential services • Implement regulatory and adopt increased digitization measures to broaden internet in service delivery, especially for access by sharing telecom- payment collections and usage ready infrastructure across records sectors and strengthen • Strengthen the federalism competition architecture through appropriate laws • Continue to maintain and guidelines and capacity building essential services but also to ensure improved service delivery undertake critical repairs to • Strengthen cybersecurity laws and infrastructure, resume some promote awareness on cybersecurity of the non-essential services, via an informational campaign and prepare a plan to ensure • Promote broadband internet access financial sustainability of and digital payments utilities • Develop sustainable and resilient • Reinforce the progress towards infrastructure and strengthen solid federalism with a focus on waste management and air and water capacity building efforts pollution control July 2020 World Bank Group 40 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update Annex 1: Potential Data requirements and sources for monitoring COVID-19 Sector/Agency Data requirements and sources Health Early Warning and Reporting System (EWARS) District Health Information System2 (DHIS2) National Public Health Laboratory network information system e-Logistics Management Information System Social protection Beneficiary data Phone or online data based on local-level beneficiary enrollment Education Labor force survey, media or pulse survey, and administrative school data Agriculture Periodic government updates World Food Program and the Food and Agriculture Association Tourism Nepal Tourism Board Periodic survey of the tourism sector using a high-frequency monitoring phone/online survey in collaboration with industry associations will be helpful Forests and Monitoring of forest cover and drivers of deforestation and forest degradation Environment Survey on impact of COVID-19 on forest-dependent people, especially indigenous peoples and other vulnerable groups Department of Forest Research and Training Center Water National water, sanitation, and hygiene (WASH) cluster Energy Data on oil and liquid petroleum gas subsidies, time and cost overruns of projects under construction, with power system demand projections in the post-COVID period Transport To address the lack of a reliable transport sector database with comprehensive or accurate data, develop a reliable transport database and the needed digital foundations Telecom/Internet Regulator, Central Bureau of Statistics Central Bank/ National Accounts, Securities and Exchange Board, Insurance Board, financial Financial intermediaries, supplemented by frequent real sector and financial intermediaries’ sentiment survey data, Ministry of Finance, Credit Information Bureau Private sector Economic census for identifying and delivering support to firms In addition, regular business pulse and doing business surveys will provide up-to-date data on evolving business conditions Macroeconomic Economic data from several sources including the Central Bureau of Statistics, Ministry of Finance, central bank (Nepal Rastra Bank), and line ministries Communications Information on media reach and penetration to identify appropriate mass media channels for effective outreach July 2020 World Bank Group 41 Post-Pandemic Nepal – Charting a Resilient Recovery and Future Growth Directions Nepal Development Update References Aga, G. 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