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Thursday, June 4, 2015 - 11:25
Earthquake tremors

The 7.8-magnitude earthquake in Nepal is affecting an estimated 8 million people. With an average GDP per capita of only US$692, the country is already one of the poorest countries in Asia. Up to 56% of the population is living below the $2 per day poverty line. While the human cost might reach 10 000 people in the days to come, the economic cost of the earthquake will be equally devastating.
The earthquake occurred 25th April 2015 killing more than 8 000 people and injuring more than 19 000, with aftershocks on 12th May of 7.3 and 6.3 magnitudes where at least 117 were killed and more than 2 500 people injured. There were also casualties caused by these quakes in neighbouring countries.
Pierre Bossuet of Coface says South African companies that have been exporting to Nepal will almost certainly face defaults from debtors, unless covered by an international credit insurer, said Coface.

According to the US Geological Survey, the estimated economic loss could exceed the GDP of Nepal. Network failures and road cuts are paralysing an already poorly equipped country. In such a small landlocked economy, the short-run effects of the disaster are likely to be massive.
Given the scale of destruction, Bossuet says Coface expects the country to plunge into recession. Nevertheless, humanitarian aid is flowing to the country and neighbouring countries have offered their technical assistance while the IMF stands ready to support Nepal’s balance of payment.
“Nepal was ill-prepared for such a major disaster,” says Bossuet. The first earthquake hit the heavily populated region of Kathmandu, which accounted for almost 30% of the national economy. The already poor transportation infrastructure (Nepal’s infrastructures ranks 132 out of 144 according to the Global Competitiveness Index) were destroyed during the disaster.
Electricity, fuel and sanitary facilities are now sorely lacking and remote surrounding villages remain unreachable. Up to 90% of the health facilities of the district surrounding the capital have been destroyed. The lack of infrastructure could therefore hinder aid and reconstruction efforts.
Nepal’s GDP was expected to grow at 5% in 2015. The country runs a persistent trade balance deficit, only compensated by large remittances. Its textile and garment sector is the country’s biggest export earner but suffers from a lack of competitiveness compared to its neighbours. Structural weaknesses, such as a lack of diversification and poor infrastructure, could hamper the country’s capacity to bounce back. Nepal’s economy remains heavily dependent on agriculture, which, in 2013, accounted for about 35% of GDP and 70% of the country’s labour force. The earthquake, which also struck rural communities, is expected to have a strong impact on food production and on the country’s capacity to transport goods.
Tourism represents a source of foreign currency, he says. The huge death toll, the destruction of various tourism infrastructures, along with the loss of several unique historical sites, will severely hit the tourism industry in Nepal.
Existing projects, and most notably the construction of a $1.6 million hydroelectric dam, could be put on hold and much needed investment could be delayed.
Humanitarian groups rushed to Nepal to provide much needed assistance. India and China, the regional leaders, have both declared increased grant aid. The Asian Development Bank has pledged to provide up to $200 million. Nepal should benefit from large remittances from expatriate workers which accounted for almost 30% of GDP in 2014.
“Reconstruction could have a huge impact on the country. Large foreign aid could also improve the country’s infrastructure. Nepal could emerge out of this stronger than before if it channels aid toward productivity-enhancing investment,” says Bossuet.
Political instability remains an issue in Nepal. Over the past few years, the situation between the main political parties has been tense. Bureaucratic delays, along with the inability of Nepalese politics to reach consensus, could significantly hamper the reconstruction process. This raises the spectre of Haiti which, despite significant foreign aid, never managed to fully recover from the 2010 earthquake.

Copyright © Insurance Times and Investments® Vol:28.6 1st June, 2015
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