Nepal’s slowing economy set for freefall without global help after earthquake

Nepal, one of Asia’s poorest countries whose GDP is smaller than any of the 50 US states, has little scope to fund a major reconstruction effort on its own.

People search for survivors stuck under the rubble of a destroyed building, after an earthquake caused serious damage in Kathmandu, Nepal. Narendra Shrestha / EPA
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Nepal was already slowing before a 7.8-magnitude earthquake killed thousands from the capital to the unforgiving slopes of Mount Everest. Now near-term growth is set to contract without the world’s help.

“Kathmandu is central to the nation’s economy, and it’s crippled,” Madhukar SJB Rana, a former finance minister, said in a phone interview on Sunday after spending the night outdoors amid countless aftershocks. “The extent of the impact depends both on the magnitude of the disaster but also on the resources and capacity to cope. We don’t have that.”

So far about 2,900 people have died, a figure set to climb as rescuers dig through rubble. The quake split roads, downed power lines, toppled buildings and triggered avalanches that killed at least 19 on Everest - a key driver of tourism in an economy also dependent on agriculture and remittances.

Nepal, one of Asia’s poorest countries whose GDP is smaller than any of the 50 US states, has little scope to fund a major reconstruction effort on its own. Even before the quake, the Asian Development Bank estimated that it needs to spend about four times more than it currently does annually on infrastructure through 2020 to attract investment.

The US Geological Survey initially estimated economic losses from the temblor at 9 per cent to 50 per cent of GDP, with a best guess of 35 per cent. It’s too hard for now to tell the extent of the damage and the effect on Nepal’s GDP, according to Hun Kim, an ADB official.

“Initial efforts will be focused on making sure people are safe following this tragedy,” Mr Kim, who heads the lender’s South Asia department, wrote in an email. About 40 per cent of the country has been affected by the quake, he said.

The ADB said on Monday that it will provide a US$3 million grant to Nepal for immediate relief efforts, and up to $200m for the first phase of rehabilitation.

Nepal has a small stock exchange and its currency is pegged to India’s rupee, making it one of the world’s best performers last year. It was unclear if financial markets or banks would open on Monday, with some banks in Kathmandu shut.

“This is a very catastrophic event in a very poor nation,” Rajiv Biswas, chief Asia economist at IHS, said in a Bloomberg Television interview with Angie Lau and Rishaad Salamat on Monday. “The cost of reconstruction over the next few years will be massive.”

Rebuilding costs could “easily exceed” $5 billion, which would be about 20 per cent of Nepal’s GDP, said Mr Biswas.

The IMF said on Saturday that it was ready to send a team to Kathmandu to assess Nepal’s financial needs and coordinate with the ADB, World Bank and others. Jubilee USA, a faith-based lobby group that campaigns for debt relief in poor nations, called on the IMF to help resolve the $3.8bn it owes to foreign lenders.

Nepal will also get help from neighbours India and China, both of which sent relief teams after the initial quake. In recent years the two powerhouses have competed for influence in the Himalayan nation, which is sandwiched between them.

China last year overtook India as Nepal’s biggest foreign investor, funding power plants, noodle factories and meat- processing units. Trade has also boomed: Nepal’s commerce with China has outpaced that with India by 17 times since 2006, eroding the influence of New Delhi’s leaders.

Aid from neighboring countries means Nepal will recover faster than it would have in previous years “but they will need hand-holding,” Rajrishi Singhal, a senior geo-economics fellow at Mumbai-based Gateway House, said by phone.

“The problem of bad infrastructure and poor logistics is now coming home to roost,” he said. “You’re looking at lower incomes, lower revenue, high inflation, loss of imports. It’s going to be a terrible year for them.”

Only weeks ago, the ADB forecast Nepal’s growth for the year ending July 15 at 4.6 per cent, down from 5.2 per cent the year before and less than the government’s revised estimate of 5.5 per cent. That reflected a weak monsoon that would lower output of paddy, maize and millet, as well as political gridlock amid a fight over a new constitution.

Kathmandu and the valley area around it account for a third of the nation’s economic activity, according to an estimate by Nepal’s central bank. The city’s international airport was reopened after shutting temporarily following the initial quake and again after a 6.7-magnitude aftershock on Sunday.

Last year, Nepal’s deadliest landslide in a decade caused destruction that knocked out 10 per cent of its power generation capacity. Nepal has sought investment to build hydropower dams that harness some 6,000 rivers fed by Himalayan glaciers, a move that would boost economic growth and end blackouts that can last more than half the day.

The third major mountain catastrophe in the past 13 months only adds to the government’s woes. Last April, an avalanche on the world’s tallest peak claimed the lives of as many as 16 sherpas. An unseasonal blizzard in October killed at least 40 people in its Annapurna range, the country’s worst mountaineering disaster.

Nepal’s current finance chief, Ram Sharan Mahat, was unreachable on his mobile phone. On Saturday, he tweeted photos of demolished buildings and estimates of death tolls.

Like many of Nepal’s citizens, Rana, the former finance minister, is just looking to make it through the next few days. He said Sunday he planned to sleep outside again due to the fear of more aftershocks even as dark clouds filled the skies.

“There’s no power, no water, nowhere to eat,” Rana said. “If it starts raining, it will make things that much worse.”