Image: Reuters
NEPAL’S BOOKS HAVE a new and unwelcome entry. Preliminary data from the insurance regulator show that claims from September’s civil unrest have already hit Rs 23.2bn, overtaking the total from the 2015 earthquakes. For a country used to shaking floors and swollen rivers, this human-made jolt is a different test. You can see it in the streets: boarded-up shops, quiet hotels, restaurants without a din and so on. But the less visible damage runs through the financial guts. A young domestic reinsurance market is about to swallow losses that used to vanish abroad. Nepal is learning to take hits at home even as its growth model grows more brittle.
The unrest, led mostly by young protestors, has struck at the economy’s core. Tourism, nearly 7% of the economic output, or GDP, has stumbled. International arrivals sank almost a fifth in the month after the protests. Hotels and restaurants are bracing for contraction. And then there is insurance. Non-life insurers calculate output as premiums minus claims. When claims spike, the sector stops being a contributor and becomes a drag. Ripples spread. Corporate tax from insurers and hoteliers falls. Weaker imports bite VAT receipts. And the government, faced with reconstruction costs, election spending and relief measures, will see the fiscal deficit widen to 2.8% of GDP.
Reinsurance is taking its first real test. A 2023 rule forces domestic insurers to cede parts of their risks to local reinsurers, mainly the quasi-state-owned Nepal Reinsurance and the privately owned Himalayan Reinsurance. Certain policies—riot and terrorism among them—must stay home. So a big chunk of September’s claims will now be paid within Nepal. In 2015 foreign reinsurers did the heavy lifting. The plan was to keep capital in-country, build expertise. Reality is proving more awkward. As one Kathmandu analyst puts it: “We are building depth in our financial sector, but we are also concentrating risk. The shock absorber is now inside the vehicle.”
The vehicle itself—the economy—is moving but cautiously. Growth will slip to 2.1% this fiscal year (see chart), reckons the World Bank, propped mainly by remittances and hydropower. Remittances, over 28 percent of GDP last year, are expected to soar as migrants repatriate savings. Hydropower exports are climbing; India recently approved more imports, so did Bangladesh. These flows produce a bulging current-account surplus and healthy reserves. They keep the macroeconomy from tumbling. But do not be fooled: the domestic economy is weak. Private investment is stalling as investors are in “wait and see” mode.
Next year’s recovery depends on the state stepping in. The 4.7% growth forecast assumes reconstruction and public construction pick up. Private non-hydro building is expected to slow. The economy drifts: overseas labour and exported electricity keep it afloat while the government-led building boom tries to restart the engine. Even agriculture, usually the safety net, has been softened by late monsoon rains in key rice-growing regions.
The human cost is in lost time and opportunity. Poverty reduction slows. More Nepalis will remain below $4.20 a day than hoped. Insurance claims, though record-breaking, cover less than 20% of total losses. The rest—shopkeepers, transporters, homeowners and so on—absorb the hit with depleted savings and foregone opportunities. Big, uninsured public assets only add to the fragility.
Nepal shows a grim kind of resilience. Its financial rules can keep a crisis local. External balances prevent a currency panic. But it is the stability of a patient on life support, reliant on external drips. Domestic reinsurance is a small step towards self-reliance. The bigger challenge, again, is to build an economy strong enough not to need it so often. ■
