A full arsenal of policies is needed to promote a solid recovery

As the coronavirus pandemic continues to hammer the world economy, lower income countries like Nepal are in a quandary about whether to allow all business activities to resume while risking a spread of the infection or continue with or reimpose restrictions to save lives but at the cost of a huge socio-economic toll it inflicts. Against this backdrop, International Monetary Fund Mission Chief for Nepal Laura Jaramillo Mayor shared with The Himalayan Times the recent downgrade of the country’s growth outlook, challenges on the road to recovery, prospects of future IMF support, among other issues. Excerpts:

This undated image shows International Monetary Fund Mission Chief for Nepal Laura Jaramillo Mayor. Photo courtesy: IMF

While the IMF has downgraded Nepal’s growth outlook for the current fiscal to 2.5 per cent, 2.5 percentage points lower compared to the April projection, considering the rising number of cases and targeted lockdowns in some areas, don’t you think this is quite optimistic?

Similar to other countries around the world, Nepal’s economy has been hard hit by COVID-19 shock. In the case of Nepal, the effect is spread across two fiscal years (which ends on July 15). The COVID-19 shock hit Nepal during the second half of fiscal year 2019- 20, derailing the growth momentum observed in the first half of the fiscal. In the IMF staff’s view, growth for the full fiscal 2019-20 was stagnant. For fiscal year 2020-21, the IMF staff expect COVID-19 to continue to weigh on the economy during the first half of the fiscal, before picking up gradually. In the October World Economic Outlook, IMF staff’s growth projection for the full fiscal year 2020- 21 is 2.5 per cent, based on available information as of August-end, 2020. The staff is monitoring developments and we will update the forecasts based on recent data releases, global trends, and policy announcements.

For a country like Nepal, where the majority of the working population is engaged in the informal sector, a complete shutdown for an extended period of time cannot be a viable solution. What could be a solution to this?

Strong health care and containment measures remain vital to flatten the pandemic curve. Targeted-containment measures are necessary, along with an effective testing, tracing, and quarantining system. Greater efforts on the curative side are also warranted, such as increased hospital capacity to diagnose and treat. Credible plans to secure adequate vaccine supplies are essential, including through multilateral vaccine sharing efforts.

What do you think is the greatest barrier for a strong recovery from this crisis for Nepal?

As other countries around the world, the COVID-19 pandemic is negatively impacting Nepal’s health sector, economic activity, and poverty alleviation efforts. Therefore, a full arsenal of policies is needed: (i) strong health policies and non-pharmaceutical interventions (such as containment, testing, contact-tracing, etcetera) to keep the virus under control and to prevent fatalities; (ii) an economic programme that helps mitigate the COVID-19 impact on the economy and vulnerable groups, while preserving macroeconomic and financial stability; (iii) policies to strengthen the investment climate in Nepal, to promote a solid recovery that will lead to sustained growth and poverty reduction.

One of the concerns due to the pandemic is that Nepal’s over-dependence on remittance may be its undoing. But this could also be an opportunity to capitalise on the country’s workforce. What is your opinion on this?

Nepal’s growth model relies heavily on employment overseas. Remittances support consumption and alleviate poverty and unemployment.

However, a shift in Nepal’s growth engine to domestic production and investment will deepen economic development.

The COVID-19 shock makes the case more compelling, as remittances have been volatile and their outlook is subdued due to the weak economic outlook in destination countries for migrant workers.

Nepal is in the midst of a demographic dividend, with its working-age population expected to continue growing strongly through about 2025. To better harness the demographic dividend, the investment climate in Nepal needs to be strengthened so that the private sector can play a larger role in driving economic activity and creating quality jobs.

Is the IMF planning to provide additional assistance to Nepal also in terms of capacity development in the coming days to tackle the pandemic?

The Fund will continue to support Nepal as the COVID-19 containment phase gives way to the stabilisation and recovery phases.

We will continue to offer tailored policy advice, as well as technical assistance and training.

The IMF provided support to Nepal’s COVID-19 response efforts with emergency financing under the Rapid Credit Facility and debt relief from the Catastrophe Containment and Relief Fund, and is ready to provide further financial assistance if needed.

IMF Managing Director Kristalina Georgieva recently told an online event hosted by the G-30 group of former policymakers and academics that a six-month extension of a freeze in official bilateral payments agreed by the G-20 major economies last week would help, but that more urgent action was needed. Could you please elaborate on the type of action that the IMF believes is needed?

The Fund welcomes the G-20’s decision to extend the Debt Service Suspension Initiative (DSSI) for another six months. The IMF and World Bank recommended a 12-month extension based on an analysis of the liquidity needs of poorest countries. Although a shorter six-month extension is envisaged by G-20, the G-20 plans a review around the time of the Spring meetings, which could adopt a further six-month extension. The managing director has also made a broader call for the international community to step up — with grants and concessional financing, additional debt relief, and in some cases reprofiling or restructuring debt. The IMF stands ready to support its members in these efforts.

Strong health care and containment measures remain vital to flatten the pandemic curve.

Targeted containment measures, effective testing, tracing, and quarantining system are a must

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