By Gabriele Parussini
Foreign aid flowing into Nepal, which was hit by a devastating
earthquake over the weekend that killed more than 4,000 people,
will be put to work to rebuild one of the world's poorest
nations.
The economic toll of the 7.8-magnitude quake, which struck on
Saturday and has been followed by myriad aftershocks, is likely to
be immense.
The U.S. Geological Survey estimates losses could exceed the
landlocked mountain state's $20 billion annual gross domestic
product. Rajiv Biswas, the chief economist for the Asia-Pacific
region at U.S.-based consultancy IHS, puts the rebuilding cost at
$5 billion over the next five years.
The disaster wiped out buildings in the capital, Katmandu, and
transportation infrastructure across the country has been laid to
waste.
There are fears the quake may have wrought damage on
hydroelectric power projects in the Himalayas, close to the
epicenter.
Power outages hit Katmandu on Monday. Crucial foreign
investment, including plans for a $1.6 billion hydroelectric dam in
the Himalayas involving Chinese money, could be put on hold,
experts said.
Tourism, which accounts for about 8% of the economy and employs
more than a million people, or about 7% of the workforce, is set to
take a near-term hit as high-end hikers and backpackers cancel
vacations.
But the role of foreign aid could have an outsize impact on such
a small country, some observers said.
Aid pledges started pouring in on Monday, with the Asian
Development Bank, a regional multilateral lender, pledging $200
million to fund the first phase of rehabilitation.
U.S. Secretary of State John Kerry on Monday said the U.S. has
pledged $10 million to help quake victims.
It was unclear how much the United Nations will seek in aid
during the emergency phase, but donations are likely to total in
the hundreds of millions. So far, foreign aid to help rebuild after
Typhoon Haiyan in the Philippines in 2013 has reached $844 million,
according to the U.N. Such funds could go a long way in Nepal.
"The only advantage they have is that the size of their economy
is small relative to donors' capacity," Mr. Biswas said.
The question now is whether Nepal's government is in a position
to oversee a complex reconstruction process. The country has been
riven for years by political discord, as factions fight over the
drawing up of a new constitution, nearly a decade after a peace
deal ended a decadeslong Maoist insurgency.
Some economists said they believe reconstruction after natural
disasters can usher in a period of better economic growth, as
infrastructure is built back better in developing countries.
Chinese authorities claimed this outcome after the Sichuan
earthquake in 2008.
Others say there is little empirical evidence to support such
claims, as any positive impact from aid is negated by destruction
of factories, private property and other infrastructure.
In Haiti, another small economy which suffered a devastating
earthquake five years ago, some $3.5 billion in aid has failed to
turn the country around; political violence and disease is still
common.
"It's not only money that you need for reconstruction, but also
human knowledge and a functioning government," said Ilan Noy, an
expert on the economics of disasters at the Victoria University of
Wellington in New Zealand. "Nepal belongs to a category of
countries where it's unclear whether the ability to execute
reconstruction will be sufficient."
Nepal's GDP per capita was only $694 in 2013, making it poorer
than Mali and Burkina Faso. The economy, which grew only about 4%
last year, much slower than neighboring India's 7% rate, relies on
its overseas workers, whose remittances account for about a third
of the economy. Unemployment is 40%, with many people eking out a
living in agriculture and trading.
It is too early to total the damages from the earthquake, said
Hun Kim, head of the South Asian department at the Asian
Development Bank. "If this was a flood or a tsunami, it would be
over by now. But as long as the aftershocks continue, we can't
start the damage assessment," Mr. Kim said.
The bank, he added, is relying on other donor agencies like the
World Bank and U.N. for information, because the government in
Katmandu is unable to provide any.
The International Monetary Fund stands ready to give Nepal
balance-of-payment support to underpin the country's economic
stability, said Thomas Richardson, the fund's representative in New
Delhi.
That could be crucial as Nepal runs a large trade deficit and
relies on tourism and remittances for foreign exchange. The
Nepalese rupee, which is pegged to India's currency, was under
pressure even before the earthquake, sparking inflation.
Multinational companies with units in Nepal have broadly halted
their operations as they try to account for staff and help out the
local relief effort.
Coca-Cola Co., which operates two company-owned bottling plants
in Katmandu and Bharatpur, said that while its factories hadn't
been affected, it had put its operations on hold and was working to
provide water to the worst-hit areas.
Standard Chartered PLC, the only major multinational to run a
bank in Nepal, said it is trying to keep part of its business open,
to enable locals to withdraw cash and do basic banking.
Politics is likely to continue to hamper the nation's progress.
Some observers said Nepal's failure to agree on a new constitution
in recent years, because of its long-running political crisis, is
likely to complicate post-disaster management.
"The earthquake will bring negotiations to a standstill," said
Nihar Nayak, an associate fellow with the Institute for Defence
Studies and Analyses in New Delhi. "Reconstruction can only be more
difficult with a broken political system."
Shefali Anand and Biman Mukherji contributed to this
article.
Write to Gabriele Parussini at gabriele.parussini@wsj.com
Corrections & Amplifications
Rajiv Biswas works for IHS as their Asia Pacific chief
economist. An earlier version of this article misstated that Mr.
Biswas works for Eurasia Group.
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