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ViewpointMay 26 2015

Nepal's finance minister lays out recovery plan

Only one week after the first earthquake hit Nepal in April 2015, Ram Sharan Mahat, the country’s finance minister, met Stefania Palma to discuss the government's plan to meet Nepal's enormous reconstruction and rehabilitation needs.
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Nepal's finance minister lays out recovery plan

All Nepalese government officials cancelled trips abroad after a 7.8-magnitude earthquake hit the country on April 25. But minister of finance, Ram Sharan Mahat, organised a last-minute visit to the Asian Development Bank (ADB) annual meeting in Baku in early May, to present Nepal’s humanitarian crisis and seek financial aid from the international community.

The only other comparable calamity in the country dates back to the 8.0-magnitude earthquake it suffered in 1932. Now, 83 years later, Nepal is facing an enormous humanitarian crisis, just as it was making key economic progress, dealing with a tumultuous democratisation process that has so far failed to produce a new constitution after the monarchy was abolished in 2007 and Nepal became a republic in 2008.

Taking stock

Nepal’s gross domestic product (GDP) growth increased to 5.2% in fiscal year 2014, from 3.5% in 2013. A favourable monsoon increased spending on services and agricultural output and there was a rise in remittance income. Growth in agriculture and services, at 4.7% and 6.1%, respectively, in 2014, was the highest in the past six years, according to the ADB.

In the past few years, Nepal had also lowered inflation, reaching 8.4% in 2014 after it hiked to 9.9% in 2009. “We have done a good job in terms of controlling inflation. The inflation rate for 2015 was 7%. But, naturally, when you have shortage of goods and services, there is a tendency for prices to rise. We will do everything we can to hold the price line,” says Mr Mahat.

The earthquake’s damage is hard to quantify, especially following the 7.3-magnitude aftershock three weeks after the first calamity. In Baku, Mr Mahat said about 300,000 households had been destroyed or damaged and more than 10,000 government buildings had been affected. Key challenges also included the lack of medical help, basic food supplies and access to a number of towns.

Damage to Nepal’s buildings and infrastructure is also affecting the local banking sector, which has real estate assets. “The services sector was hit heavily, especially the real estate sector. This affects the banking sector, tourism and manufacturing. [This means] the expected GDP growth of 5% for 2015 will be difficult to achieve,” says Mr Mahat. GDP growth in Nepal may decline to 4.2% for fiscal year 2015, according to the ADB.

Detailed damage assessment is necessary for longer term reconstruction work. Once damage is quantified, Nepal will join an international conference that Japan’s finance minister, Taro Aso, offered at the ADB meeting, to host in partnership with other agencies. The conference’s timing and location have yet to be decided. Mr Mahat mentioned Japan as well as China, India and the US as likely sources of financial help.

Road to recovery

Nepal is also taking the matter in its own hands. It set up a $2bn national reconstruction fund, and the state has already earmarked $200m, according to Mr Mahat. “This amount is from the treasury. We’ll have to divert internal resources in the next two to three years, restructure the existing budget, mobilise other resources and do internal borrowing. We have to resort to all possible sources,” he says.

Though grants are Nepal’s first choice of aid, Mr Mahat is also open to credit. “We are even open to taking out loans. We have a very good reputation with credit,” he says.

Though keen to receive international support, Mr Mahat underscores the need to monitor any goods or money entering Nepal. “Let money and goods come in as long as they are coming from recognised bodies. These organisations need to be accountable and relief well co-ordinated,” he says.

The ADB remains the only multilateral organisation to have supported Nepal so far. It announced a $3bn grant to support immediate relief efforts and a $200m concessional loan after the first earthquake. In Baku, the ADB announced it would add $300m-worth of concessional loans by re-allocating resources in the bank’s existing projects in Nepal. On May 18, the ADB announced it will also expand Nepal’s trade finance programme by $40m to help banks finance imports of necessary goods. Since trade finance is typically short term, and can roll over in less than 180 days, the impact of this facility can reach $80m within a year, says Steven Beck, ADB’s head of trade finance.

The Nepal earthquakes have shaken a country whose economic progress was under way and that continues to face a choppy and delicate democratisation process. If Mr Mahat’s call for financial help is met by the international community, Nepal can hope to rebuild the country and bring its full economic and political potential to fruition.

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