Why certain industries were hit harder than others during the COVID-19 pandemic?

The COVID-19 pandemic has severely impacted certain industries, such as the tourism and services sector that rely on the movement of people and in-person contact, while leaving others, such as the e-commerce and IT sector relatively less harmed. It led to a recession in the Nepali economy for the first time in almost 40 years[1], set off by a sudden shutdown of consumer activity due to the health crisis.

In a circular issued on 27July 2020, the central bank of Nepal, Nepal Rastra Bank (NRB) put various sectors into three categories based on the level of impact caused by the COVID-19 — highly-affected, semi-affected, and least-affected. [2]

  • Highly affected sectors: Tourism industry (hotels, restaurants, trekking/travel agencies, homestays, and resorts), aviation and transportation, entertainment hubs, poultry farming, bee-keeping and livestock farming, and foreign employment recruiting agencies
  • Semi-affected sectors: Plastic and home appliances manufacturers/traders, educational institutions and child-care centers, beauty parlors and hair salons, consultancy service providers, hospitals and clinics, construction sector, pharmaceutical producers, under-construction hydropower, and renewable energy projects
  • Least-affected sectors: Hydro projects that are already connected to the national electricity grid, e-commerce businesses, essential goods producers, importing trade, petroleum industry, advertising services, internet and telecommunication service providers, liquor and tobacco business, and gold and other jewelry business [3]

The following factors help us understand why certain sectors were highly affected by the pandemic while others were semi or least affected sectors:

Essential or non-essential goods

A key factor that explains why certain industries were more immune to the crisis is the nature of the goods – whether it is a necessity/essential good or a luxury/non-essential good. Consumers will buy essential goods regardless of the changes in their income levels, making products in this category less sensitive to income change or the economic and health crisis caused by the pandemic. These include industries such as food, water, electricity, healthcare, pharmaceuticals, and so on. Thus, essential goods producers were classified under the least affected sectors by the NRB.

On the other hand, demand for luxury goods falls in times of crisis as consumers choose to avoid spending on non-essential goods depending on their income level and employment during the pandemic and prefer to save instead. These include sectors such as arts, entertainment, and recreation, tourism, dining out, etc., and fall under highly affected sectors.

Ability to switch to online and remote work

Another factor that plays a role in the performance of industries during the pandemic is the ability of businesses to switch to online and remote work. Social distancing requirements led to a sharp increase in the use of technology for remote work. The pandemic introduced the following trends around the world – offices switched to working remotely, people shopped online from home, sought entertainment online, and joined online classes. Amazon, the biggest online retailer added 400,000 jobs in 2020, nearly doubling its workforce even during the pandemic.[4] Companies like Daraz Sastodeal, Hamrobazaar, Foodmandu, and other e-commerce businesses in Nepal have also benefited from these trends.[5]

However, a good majority of Nepal’s 30 million people do not have the means to work from home, attend online classes, and order groceries for home delivery. According to the World Bank, in Nepal, the number of jobs that can be performed from home “drops from 14.7% to 6.3% once internet constraints are accounted for.” [6] Moreover, industries that depend on in-person contact, such as the services industry, were the most negatively impacted. Sectors including e-commerce businesses, internet, and telecommunication service providers, educational institutions, consultancy service providers, with the ability to switch to online and remote work were classified under semi or least affected sectors by the NRB.

Nature of the crisis – health and safety measures

In addition to the two reasons mentioned above, the nature of the COVID-19 health crisis, which led to several safety measures and restricted movement, also affected the demand and supply of goods. The table below shows the degree of the pandemic’s impact on various sectors of the economy, analyzing the nature of shocks (external, demand, or supply), the extent of output loss, the effect on employment, and the effect on foreign exchange (FOREX) reserves in those sectors.

Table 1: Impact Analysis Matrix

Accommodation and food High External shocks and Demand shocks High High High
Transport and storage High External shocks and Demand shocks High High High
Arts, entertainment, and recreation High Demand shocks High High Low
Agriculture – Dairy, Vegetable & Poultry Medium Demand shocks and Supply shocks Medium Medium Low
Manufacturing Medium Supply shocks Medium Medium Low
Construction Medium Supply shocks Medium Medium Low
Wholesale and retail trade; repairs of motor vehicle and motorcycles Medium Demand shocks and Supply shocks Medium Medium Low (positive)
Source: Rapid Assessment Of Socio-Economic Impact of Covid-19 in Nepal, UNDP 2020

Social-distancing guidelines and stay-at-home orders led many people to cancel their travel plans, including treks to the Everest area, and negatively impacted the tourism and services industry. The trade and agriculture sectors further experienced demand shocks as demand from the accommodation and tourism sectors fell. These sectors also experienced supply shocks due to disruption in either external or internal supply chains. However, the economic activities and employment in some sectors are likely to pick up once the lockdown measures are lifted. [7]

In conclusion, several factors contribute to the performance of the industry during the COVID-19 crisis, including the nature of the health crisis, the new social distancing and health guidelines, the type of good (necessary or luxury) in the industry, and the ability to switch to online and remote work. Some of the hardest-hit industries were services, hospitality, and tourism. Industries that were able to adapt to the changes in consumer spending and habits and provide online services fared well despite the crisis, such as e-commerce and technology industries.

[1] https://kathmandupost.com/national/2021/03/05/nepal-witnessed-economic-recession-but-quick-recovery-likely-economists-say

[2] https://thehimalayantimes.com/business/nepal-rastra-bank-pins-relief-to-covid-impact

[3] https://thehimalayantimes.com/business/nepal-rastra-bank-pins-relief-to-covid-impact

[4] https://www.washingtonpost.com/technology/2020/10/29/amazon-hiring-pandemic-holidays/

[5] https://kathmandupost.com/money/2020/11/08/alibaba-invested-in-nepal-because-of-the-potential-here

[6] https://documents1.worldbank.org/curated/en/225881596202941026/pdf/Who-on-Earth-Can-Work-from-Home.pdf

[7] https://www.np.undp.org/content/nepal/en/home/library/rapid-assessment-of-socio-economic-impact.html