Earthquakes set Nepal’s economy back by more than a decade

Over the last two days, Nepal has been rattled by its worst earthquakes since 1934. More than 3,000 people have lost their lives, and villages, roads, highways and ancient buildings have been devastated. The total economic losses from the damage could be between $1 billion and $10 billion, according to the US Geological Survey’s best estimate.

nepal dethIn all, the destruction could push the economy of Nepal—already one of the world’s poorest countries—back by a decade or more, significantly hurting the small Himalayan nation’s efforts to move from a “Least Developed Country” to a “Developing Country” by 2022.

“Almost 100 quakes in the last 24 hours have pushed us 50 years back to the past, in terms of infrastructural damage alone,” said Mukesh Khanal, an economist who works in the international development sector in Nepal.

“Highways and roads have suffered structural damage, and we do not know what kind of structural damage Nepal’s numerous hydropower dams and generators have endured,” Khanal told Quartz in an email.

“Officials will eventually go and check them, but I fear huge damage,” he said. “They will have to be torn down and rebuilt, which means reduced electricity production for some years. So, I see great challenges for the government and the economy in the coming days.”

Even before the earthquakes, Nepal’s GDP was forecast to grow much much slower than most neighbouring countries, thanks to an unemployment rate of over 40%, and years-long political deadlock that has prevented much-needed investment.

Agrarian no more

Until the 1990s, the Nepalese economy was predominantly agrarian, and the sector is still vital to Nepal’s economy. But in recent years, manufacturing and services sectors also saw growth, which then drove labour to these industries (pdf).

Agriculture now contributes about 33.7% to Nepal’s $19 billion economy, while the services sector brings in about 52.2% of the GDP. The services sector includes industries like tourism, hotels and restaurants, trade, construction and real estate. Industries like manufacturing and power contribute the remainder, around 14%.

Many Indian and international consumer goods companies have manufacturing facilities in Nepal. For instance, Dabur, ITC and Varun Beverages—a bottler for PepsiCo—have manufacturing plants there. International beverage maker Coca-Cola also has a factory in Nepal.

The country’s economy is highly dependent on tourism and remittances. In 2013, for instance, remittances accounted for 29% of the GDP, a result of a huge migration of workers to foreign countries, thanks to a lack of employment opportunities at home.

Tourism trouble ahead?

Nepal has seven UNESCO World Heritage sites, of which four were damaged in the earthquake. Another architectural attraction, Dharahara, an iconic 19th-century tower in Kathmandu, crumbled after the quake. Foreign tourists also come to the Himalayan country to climb Mount Everest and other peaks.

That damage could hit one of Nepal’s fastest-growing economic sectors. In 2013, according to the World Travel and Tourism Council, travel and tourism generated about 7% of the total jobs in the country and contributed about 8.2% to Nepal’s GDP. By 2024, the contribution to the GDP was forecast to rise to almost 10%.

The 25 to 27 mountainous districts hit by this earthquake, both to the east and the west of Kathmandu, are popular for tourism-related activities, explains Alok K. Bohara, an economics professor at the University of New Mexico, and founding director of the Nepal Study Centre.

“Tourism provides more than half a million jobs for the Nepalese,” Bohara told Quartz in an email, so if the earthquakes scare tourists away, that “will have a major impact” on the economy.

Khanal adds that the reputation of Mount Everest climbs has taken a hit in the last couple of years. “This current incident could reduce the number of tourists wanting to go there in the next few years,” he said.

“Tourism has been extremely important for Nepal,” Gyan Pradhan, a professor in the department of economics at Eastern Kentucky University, told Quartz. “After worker remittances, tourism is Nepal’s largest source of foreign exchange.”

That’s a particularly important contribution, because Nepal’s currency is pegged to the Indian rupee, which has weakened this year. The country’s imports have also been growing—since 2010, they have increased 25.9% on an average annually. This means the trade deficit is huge indicating the country’s continued need for foreign exchange.

Decades of instability

Thanks to political unrest and Maoist insurgency, Nepal has underperformed compared to its neighbours for years. On the UN’s Human Development Index, which measures life expectancy, education and per capita income indicators, Nepal ranks at 145, lower than Laos, Congo and even neighbouring Bangladesh. It has the lowest spending power compared to any Asian country except Afghanistan, according to the International Monetary Fund.

And this massive earthquake could make things worse.

“As the country rebuilds, tourism can be expected to pick up once again,” Eastern Kentucky University’s Pradhan said. “This rebuilding, however, will take several years, perhaps a decade.”