The Ripple Effects of the Middle East Conflict on Nepal’s Economy
As the fires of conflict in the Middle East continue to burn, their impact is being felt far beyond the immediate region. For Nepal, a country deeply connected to the global energy market and reliant on labor corridors in West Asia, the economic stakes are unprecedented. This article explores the effects of the ongoing turmoil on Nepal’s economy, delving into fuel volatility, inflationary pressures, and the structural changes needed to safeguard the nation.
Fuel Prices and Inflation: A Cascading Impact
The relationship between fuel prices and the broader economy is complex and interconnected. When fuel prices rise, the most immediate effect is seen in inflation. This surge in the cost of a key commodity triggers a ripple effect across multiple sectors, particularly transportation, which is a vital component of the supply chain. As the cost of moving goods increases, it impacts wholesale and retail markets, ultimately affecting the food supply chain.
In the context of Nepal, the transmission of these price increases is particularly severe because fuel acts as a foundational input for agriculture, industry, and the service sector. The current crisis in West Asia is threatening the agricultural sector, which engages approximately 62 percent of the population and contributes nearly 25 percent to GDP. The volatility leads to a two-pronged crisis: the unavailability of fertilizers due to supply chain obstructions and the prohibitive costs of those fertilizers when they are available.
Industrial and Service Sector Challenges
The industrial sector faces a daunting challenge characterized by an acute shortage of raw materials, which significantly hinders production. Historically, the industrial sector contributed around 22 percent to GDP, but this figure has dwindled to 12 percent. The fuel price hike is set to further complicate the path towards a robust manufacturing base.
Simultaneously, the service sector, specifically tourism, is poised for a significant downturn. Nepal relies heavily on tourists from the Middle East, Europe, and the Americas, as well as India. With global agencies like Moody’s slashing India’s growth projections, the pool of potential tourists from our primary market is likely to shrink. This decline threatens nearly 25 percent of Nepal’s GDP, including contributions from wholesale and retail, transportation, and the hotel and restaurant industry.
International Projections and Domestic Inflation
International projections regarding ‘dollars per barrel’ translate into inflation that affects the marketplace. The Asian Development Bank (ADB) suggests that if fuel prices reach $155 per barrel in the second quarter of 2026, it could lead to a 3.2 percentage point increase in inflation. Given current inflation rates hovering around 3.6 percent, this scenario could push domestic inflation toward the 6 percent mark.
Research by the International Monetary Fund (IMF) indicates that for every 10 percent increase in petroleum products per barrel, inflation rises by approximately 0.4 percentage points. This poses a significant risk for Nepal, where the government aims to keep inflation within a 5 percent ceiling this year.
Preparing for External Shocks
To prepare for external shocks, a multi-pronged approach is necessary. First, focusing on consumption reduction is crucial. The government’s recent decision to implement a two-day public holiday per week to curb fuel use is a step in the right direction. At the individual level, substituting Liquefied Petroleum Gas (LPG) with electric stoves and promoting mass transportation and vehicle pooling in urban centers can help.
However, the government’s revenue growth is stagnant at around 4 percent, limiting its ability to provide widespread subsidies. The burden of coping will largely fall on individuals and institutions, particularly the middle and lower-middle classes.
Long-Term Priorities and Energy Security
Reconciling theoretical potential in energy with the reality of current dependence requires a focus on food and energy security. Promoting domestic agriculture and reducing reliance on Indian electricity during the dry season are critical steps. Digitalization also offers a pathway to resilience, leveraging the lessons from the pandemic to digitize government services and education.
Addressing Supply Chain Issues
The difficulty in finding cooking gas today is a combination of both international obstructions and domestic failures. While initial reports pointed to hoarding, the situation has transitioned into a genuine supply-side problem. Regulatory bodies must step up to prevent artificial shortages and ensure stability.
Exploiting Internal Resources
The discovery of natural gas reserves in Dailekh presents an opportunity to pivot industrial policy. Collaborating with the private sector on clean energy production and developing the entire supply chain, including battery manufacturing and mineral extraction, is essential for long-term resilience.
Human Capital and Productivity
Investing in education and vocational training is crucial for enhancing productivity. Encouraging science-based paths among young people prepares them for future crises. Integrating sustainable development with energy and tourism sectors enhances resilience against global shocks.
Sustainable Measures and Policy Reforms
Government measures such as a two-day weekend and odd-even vehicle rotation are timely and necessary in the short term. In the long run, these policies could become permanent positive changes, promoting domestic tourism and improving labor-leisure balance.
Future Projections and Labor Impact
Fuel prices depend on the duration of the crisis. If the conflict continues, prices could reach $155 per barrel, though this figure should be approached with caution. Ensuring the working class is not left behind requires mechanisms such as guaranteeing production and coordinating efforts between the public and private sectors.
Migrant Workers and Remittances
Migrant workers face a double-edged sword of declining real wages abroad and job loss, impacting remittance flows. Coordination between all layers of government and the private sector is essential to support the lives of ordinary people during this period of global volatility.
