This blog is part of a series of articles that Eurodad is producing in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), complementing and updating the "Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket?" that was published in October 2020. Over the coming months, we will publish a variety of articles looking at the implementation of the DSSI and the debt situation in countries in the global south. For this report, we will turn the spotlight on Nepal.

The health and social consequences of the pandemic

At first, efforts to contain Covid-19 were successful in Nepal. A nationwide lockdown was implemented between 24 March and 21 July 2020. Containment measures helped to keep the spread of the virus under control. However, the number of cases skyrocketed after the lifting of the restrictions. According to the World Health Organization (WHO), Nepal reported 17,844 cases of Covid-19 and a total of 40 deaths by 21 July. Since then, reported cases have increased to 263,193 and 1,899 people have died of Covid-19 as of the first week of January 2021. Workers in the healthcare sector have recently warned that the country was facing a “catastrophic” situation given the limited capacity for testing, monitoring and provision of care. 

Financing constraints have hampered the response of local authorities. The government allocated 2.3 per cent of Gross Domestic Product (GDP), equivalent to US$ 740 million, to finance its Covid-19 response package in 2020. The government programme included a temporary increase in healthcare expenditures (1.3 per cent of GDP), two months of food rations for the most vulnerable people (0.5 per cent of GDP) and income support for those who had lost formal sector employment (0.2 per cent of GDP). However, given the insufficient multilateral support provided to the country, most of these resources were obtained from cuts in other areas of the public budget. These expenditure cuts amounted to 1.7 per cent of GDP in 2020, equivalent to US$ 547 million.    

Reductions in public expenditure in other areas are expected to have devastating impacts on the living standards of Nepal’s population. The country lacks an adequate social safety net to buffer the impact of the crisis on the most vulnerable. Currently there are 9.9 million people (34 per cent of the population) with incomes below the poverty line. This number is set to increase by at least 1.2 million as a result of the pandemic. Children in the country are facing a critical situation. UNICEF estimates that the number of children experiencing multidimensional poverty will increase from 1.3 million to 7 million as a result of the pandemic. In addition, schools have remained closed for most of the year, with a partial reopening taking place in October. An estimated 8.8 million children have been affected by these measures. 

As in other countries, such as Ecuador and Kenya, women in Nepal have been left to deal with the additional burdens created by the pandemic and a faltering public response. Women in the country spend more than three times as many hours on unpaid care work than men. Women spend approximately 6.5 hours in unpaid work and care work, and an additional two hours in fuel and water collection each day. The crisis has exacerbated this unequal dynamic as a result of school closures and employment losses. A survey conducted by UN Women in Nepal shows that the number of women without jobs has increased fourfold while women have simultaneously experienced an increase in non-paid care activities in the aftermath of the pandemic. 

A grim economic outlook: weak recovery and debt

Only five years have passed since the massive 7.8 magnitude earthquake in Nepal that left almost 9,000 people dead, 800,000 homes destroyed and cost an estimated US$ 10 billion. More than 1,000 health facilities and 5,000 schools were turned to rubble. At the time, Nepal’s foreign debt stood at US$ 3.8 billion. Civil society organisations in Asia and globally called for the cancellation of Nepal’s debt. However, the International Monetary Fund (IMF) refused to even extend debt relief because Nepal did not meet the criteria that at least one-third of the country’s population and 25 per cent of productive capacity had been impacted. 

The 2020 pandemic has hit Nepal equally hard as a result of its dependence on tourism and workers’ remittances. Taken together, both sectors represent 26.8 per cent of the country’s GDP. The IMF estimates that both sources of hard currency is likely to have declined by a total of 7.2 per cent of GDP (US$ 1.9 billion) in 2020. The outlook is concerning as it is estimated that at least 1.5 million Nepalese migrant workers will be forced to return from countries such as India. This will place additional strains on a weak and vulnerable public sector.

In turn, it is estimated that GDP growth is likely to decline from 7.1 per cent in 2019 to 0 per cent in 2020. The impact on employment has been devastating. A local survey found that 77 per cent of firms did not have enough cashflow to pay employees’ salaries, rental fees and interest on bank loans. As a result, they had been forced to lay off one out of every five workers. This ratio increased to almost one in every two workers in tourism-related sectors. More than 2 million people are expected to lose their jobs in a context where only one out of five workers is employed in the formal sector. 

As the crisis tears through the fabric of the domestic economy, government finances will sustain a significant hit. Fiscal revenues are projected to decline by 2 per cent of GDP (US$ 707 million) in 2020. As a result, the IMF expects primary expenditures to decline permanently below pre-crisis levels, from 30 to 28.6 per cent of GDP between 2019 and 2023. In this context, most of the off-setting expenditure cuts introduced in 2020 are likely to become permanent. This will weaken the public sector at a time when public services are most needed. 

The main driver behind this process of fiscal consolidation is the large increase in the debt burden of the country. Public debt levels are set to increase from 30.1 to 43.8 per cent of GDP between 2019 and 2023. In absolute terms, this represents an increase of US$ 7.2 billion. Most of the build up will take place through issuance of debt in domestic markets. Domestic public debt is projected to increase its share of public debt from 43.5 per cent to 52.9 per cent over these years. While domestic debt reduces the degree of vulnerability to external shocks, it also increases debt servicing costs.

Debt is set to further limit the capacity of the Nepalese government to respond to the needs of its population. As a result of the changes in the volume and composition of public debt, the share of government revenues devoted to debt service will increase from 24.4 per cent in 2019 to 28.5 per cent in 2022. This will place further downward pressure on expenditures on education and health. The government allocated an equal amount of resources to pay its creditors (6.3 per cent of GDP) and finance public health (1.2 per cent of GDP) and education (5.1 per cent of GDP) in 2019.

Against this backdrop, multilateral support has been inadequate. Participation in the G20 DSSI has allowed Nepal to defer US$ 32 million in bilateral debt payments in 2020. This represents less than 13 per cent of total public debt external payments for the year. The remaining 87 per cent is owed to multilateral creditors, which are not required to participate in the DSSI. In addition, the country received a loan under the IMF Rapid Credit Facility (RCF) for US$ 214 million to address the pandemic. While the programme does not include binding conditionalities, it does envision a steep process of fiscal consolidation in the near future. Furthermore, even after the disbursement of resources, Nepalese people continue to live precariously as they are still struggling with post-earthquake reconstruction, and now face additional challenges from the pandemic while still striving to make debt service payments.

Lessons learned: Time to cancel public external debt

The case of Nepal clearly shows that debt service suspension by bilateral creditors is insufficient to tackle the challenges faced by the country. It highlights the need for both inclusion of multilateral creditors as part of the G20 DSSI, as well as a more ambitious scheme for multilateral debt relief beyond the terms proposed by the G20 Common Framework. It also underscores that a more helpful move for Nepal at this time is to cancel its external debt. Multilateral support of this type will be key to make sure that Nepal can recover from the crisis while providing protection and support to the country’s most vulnerable people.

This blog has been authored by the Tax and Fiscal Justice Alliance Nepal and Asian Peoples' Movement on Debt and Development (APMDD), in collaboration with Eurodad