Impact of post-earthquake reconstruction on Nepalese economy

Nepal was struck by two powerful earthquakes of 7.8 and 7.3 Richter scale on 15th April and 12th May 2015 respectively which was later followed by numerous aftershocks. The earthquake affected the lives of the one-third population with 8790 deaths and 22300 injuries and the 7 billion US dollar worth of damages and losses. A total of 31 districts were affected out of which 14 districts were highly affected while others were less affected. Undoubtedly, the severe impact on people’s assets and livelihood is expected to have a long term socio-economic impact on people and communities.
National Reconstruction Authority (NRA) was established on 25th December 2015 with the primary mandate to reconstruct the damaged/destroyed infrastructure by 2020. NRA has been entrusted to reconstruct 817000 private houses, retrofit 70000 houses, reconstruct 7553 public schools, reconstruct 891 archaeological and historical heritage sites, reconstruct/retrofit 1197 health institution building, reconstruct/retrofit 415 government buildings, and reconstruct 383 security agency buildings.
This study is an attempt to present the economic update of the reconstruction efforts undertaken by the NRA towards the overall recovery from the 2015 earthquake.
In particular, the focus is to provide an indicative picture of the effects of reconstruction on economic growth and employment and review the status of infrastructural recovery and financial inclusion. Using time-series data from the Central Bureau of Statistics and the World Bank, this study attempts to establish the association between reconstruction activities and economic growth. In order to further establish the effects on employment generation, Nepal Labour Force Survey reports and other available evidence are examined. For the purpose of analyzing the reconstruction status of public and private infrastructure, a review of available documents both published and unpublished are carried out.
This study has been conducted within a short span of time that limited the scope of data collection. Moreover, the inferences about the effects of reconstruction on economic growth and employment are based on few plausible assumptions. Hence, the results are indicative only. A more detailed and comprehensive study is required to adequately cover the objectives and scopes considered in this study.
The economy suffered heavily in the immediate aftermath of the earthquake; the GDP growth rate plunged to 2.97 percent in FY 2014/15 and to its record low of 0.20 percent in 2015/16. The estimated value of loss due to the earthquake was US$ 7.06 out of which 76 percent of the total losses were in the private sector. Housing constituted the major component of the reconstruction accounting for 49 percent of the total financing requirements. Out of the total of 816686 houses, 88 percent were destroyed/damaged in highly affected districts only. Sindhupalchok, Dhading, Kavrepalanchok, and Nuwakot each accounted for about 10-12 percent of the total houses destroyed/damaged in highly affected districts while Lamjung, Solukhumbu, and Tanahun each accounted for 10-13 percent of the total houses destroyed/damaged in less affected districts. So far as the public infrastructure is concerned, the total estimated losses in the public sector are about US$ 1.7 billion which is about 24 percent of the total estimated losses of US$ 7.06 billion. Out of these, the education sector experienced the total estimated losses of US$ 313.18 million, the health sector of US$ 75.44 million and the cultural heritage of Rs. US$ 192.23 million. The earthquake also adversely affected people’s livelihood by affecting agricultural production, household’s productive assets, and employment. It is estimated that the agricultural sector faced US$ 255 million worth of damage and that 94 million workdays were lost due to the earthquake.
This study utilizes two different approaches to analyze the effect of post-earthquake reconstruction on economic growth. The first inference is made from the contribution of the construction industry to GDP vis-à-vis other major industries before and after the earthquake. The second inference is made by exploiting an econometric model.
The first approach reveals that the contribution of the construction sector to GDP remained roughly constant before the earthquake while it increased after the earthquake. The same for all other major sectors have been decreasing over time and has fallen rapidly particularly after the earthquake. The second approach shows that post-earthquake reconstruction has contributed positively to economic growth. In other words, reconstruction activities increased the GDP by 4.5 percentage points, on average, after the earthquake. This is construed as a lower bound estimate of the effects of reconstruction on economic growth owing to the limitations in the availability of data of other major variables required in the model, the use of conservative econometric model and the confounding effects of the 2015 blockade, natural shocks, and other concurring adversities.
This study also shows that housing reconstruction alone created jobs equal to 255 million man-days which is equivalent to 1.42 million people being employed by the end of FY 2076/77. Currently, 0.55 million people are working in the reconstruction of houses with jobs equal to 100 million workdays being created. NLFS 2017-18 reports that one in seven people and one in five male was working in the construction industry. In other words, 14 percent of the total working population and 20 percent of the total male population was working in this industry. The latter ratio is the highest across all the top four employer industries in 2017-18. For example, while one in five male was working in the construction industry, one in seven male was working in agriculture, forestry and fishing industry and one in six male was each working in manufacturing and wholesale industry.
This indicates that the construction industry has been the largest employer in recent periods. Roughly speaking, about 7 percent of the total employment in 2017-18 was created from the reconstruction of destroyed/damaged infrastructure alone. This is also a lower bound estimate of the total employment in the reconstruction work because this calculation is based only on a basic structure of house proposed among others and also this excludes the employment in the reconstruction of public infrastructure.
The recovery of the private infrastructure is satisfactory while the recovery of some public infrastructure needs attention. About 61 percent of the private houses have been reconstructed while more than 70 percent of the reconstruction works of the schools and the government buildings have been completed. The reconstruction of health institutions, security buildings, and cultural heritage sites needs attention.
Finally, the reconstruction process has also helped to promote financial inclusion by requiring the households to open the bank accounts to receive the housing grant. NRA records show that about 770000 registered beneficiaries have opened bank account out of which 30 percent of bank accounts belong to women. Likewise, the regular interaction of these beneficiaries with the government and non-government system and their staffs, participation in meetings and pieces of training have also helped increase their mobility, self-confidence, and awareness.