Jun 01, 2015

Nepal Earthquake: The Long-Term Economic Impact

The 7.8-magnitude earthquake that struck Nepal in late April 2015 has killed more than 5,500 people, and destroyed or damaged many historic sights. Nepal is home to seven official U.N. World Heritage sites, four of them in the Kathmandu Valley around the capital. These temples and squares draw hundreds of thousands of tourists, who fuel a large part of Nepal’s economy.

According to the U.S. Geological Survey’s best estimate, the total economic losses from the damage could be between $1 billion and $10 billion. According to Rajiv Biswas, chief Asia economist at HIS, rebuilding costs could exceed $5 billion, which is about 20 percent of Nepal’s gross domestic product (GDP).  The most recent numbers by the Nepal government estimate the damage at about $10 billion, nearly half the country’s GDP of $19.2 billion.

HIS Global Insights, a research firm, says that the estimated cost for rebuilding homes, roads, and bridges could run up to $5 billion.

Nepal’s Economy Pre-Earthquake

Nepal is already one of the world’s poorest countries. The Himalayan nation was making an effort to move from a “Least Developed Country” to a “Developing Country” by 2022. Compared to neighboring countries, Nepal’s GDP was expected to grow at a lower pace, due to long-term political turmoil that made investment difficult and an unemployment rate of over 40 percent.  Currently, Nepal’s GDP is smaller than any of the 50 U.S. states.

GDP Growth

GDP Growth

Source: The World Bank

Until the 1990s, Nepal’s economy was primarily driven by agriculture, and this sector is still important to the country. However, in recent years, manufacturing and services sectors have also seen growth. Agriculture now contributes about 33.7 percent to Nepal’s $19 billion economy, while the services sector brings in about 52.2 percent of the GDP. The services sector encompasses industries such as tourism, hotels and restaurants, construction, real estate, and trade. Industries such as manufacturing and power contribute about 14 percent to the GDP. However, approximately 75 percent of Nepal’s population of 27 million is still employed in the agriculture sector, according to the Central Intelligence Agency (CIA).

Real Value Added by Economic Sectors

 Real Value Added by Economic Sectors

Source: Overseas Development Institute

The country’s economy is highly dependent on tourism and remittances. In 2013, remittances accounted for 29 percent of the GDP, due to a huge migration of workers to foreign countries because of a lack of employment opportunities in Nepal. According to the World Bank, over 25 percent of those living in Nepal are considered impoverished.

Additionally, Nepal’s currency is pegged to the Indian rupee, which was weakened in 2015.

Nepal’s imports have also been growing, increasing an average of 25.9 percent annually since 2010. This means that there is a large trade deficit, which indicates Nepal’s continued need for foreign exchange.

On the UN’s Human Development Index, which measures life expectancy, education and per capital income indicators, Nepal ranks at 145, lower than Laos, Congo, and Bangladesh. According to the International Monetary Fund, Nepal has the lowest spending power of any Asian country except Afghanistan.

“This is a very catastrophic event in a very poor nation. The cost of reconstruction over the next few years will be massive.” ~Rajiv Biswas, Chief Asia Economist at HIS

The Impact of the Damage on Tourism

Three royal plazas – the Durbar Squares of Kathmandu, Patan, and Bhaktapur – are almost completely destroyed. These squares date back to the 5th century, and were home to Nepal’s royal families until the 1800s. UNESCO, the UN cultural agency, estimates that 80 percent of the temples are significantly damaged.

Economist expect this damage to severely hit tourism, which makes up 8.2 percent of Nepal’s GDP, and 7 percent of total employment. By 2024, this contribution to GDP was expected to rise to almost 10 percent, according to the World Travel and Tourism Council.

The 25 to 27 mountainous districts ht by the earthquake are popular for tourism-related activities. Nepal’s tourism ministry says that 797,616 tourists visited the country in 2013, with each spending an estimated US $42.80 per day. Analysts believe this estimate to be conservative because it only covers hotels and restaurants, and does not include a large number of other direct and indirect sectors. Estimates for the number of Nepalese employed in the tourism industry vary widely, even within the same report, ranging from 38,148 to 178,000.

“Tourism provides more than half a million jobs for the Nepalese.” ~Alok K. Bohara, Economics Professor at the University of New Mexico and Founding Director at the Nepal Study Centre

Governments of various countries are already issuing travel advisories, encouraging people to cancel all non-essential travel to Nepal for the foreseeable future. The United States, Britain, India, Australia, and New Zealand have all issued travel advisories.

“As the country rebuilds, tourism can be expected to pick up once again. This rebuilding, however, will take several years, perhaps a decade.” ~Gyan Pradhan, Economics Professor at Eastern Kentucky University

“Almost 100 quakes in the last 24 hours have pushed us 50 years back to the past, in terms of infrastructural damage alone.” ~Mukesh Khanal, Economist in Nepal’s international development sector