ADB Report: Conflict Poses Economic Crisis Risk to Nepal’s Remittance-Dependent Economy

March 26, Kathmandu – A recent study by the Asian Development Bank (ADB) has highlighted the serious economic risks posed to remittance-dependent countries like Nepal due to the ongoing conflict in the Middle East. The latest report titled ‘ADB Briefs 384’ warns that the conflict could lead to rising energy prices, supply chain disruptions, tightening financial conditions, and notably, a significant decline in remittance flows.

The report emphasizes that the conflict will directly affect remittance inflows, disproportionately impacting countries such as Nepal that rely heavily on remittances from West Asia.

According to the report, remittances from West Asia account for 8.1 percent of Nepal’s Gross Domestic Product (GDP), the highest share among Asian nations. An economic downturn in West Asian countries is expected to reduce demand for Nepali labor and lower their earnings, which will directly affect foreign currency inflows into Nepal.

For countries like Nepal that rely completely on imports for fuel, the rising prices of crude oil and natural gas present another daunting challenge. The conflict pushed crude oil prices as high as $120 per barrel. Although prices fell slightly following the announcement by the U.S. president to temporarily halt attacks in Iran, renewed signs of conflict escalation have driven Brent crude prices back up to $107 per barrel. Key oil-importing countries in the Asia-Pacific region include China, India, Japan, and South Korea.

ADB projects that if the conflict continues, economic growth rates in developing Asian countries could drop by 1.3 percentage points, while inflation may rise as much as 3.2 percent. South Asia is expected to experience the highest increase in inflation within the region, with prices potentially rising up to 4.9 percent.

West Asia is also a major hub for chemical fertilizer production. The conflict has disrupted the export of urea and ammonia from countries like Qatar and Saudi Arabia, rapidly elevating global fertilizer prices. The report notes that urea prices increased by 42.9 percent between February 27 and March 13. This surge is likely to increase agricultural costs and put upward pressure on food prices in agrarian countries such as Nepal.

Additionally, disruptions in trade routes such as the Oman and Hormuz Straits have led to significant increases in shipping costs and insurance premiums. This will inevitably raise the prices of various imported goods in countries like Nepal.

To mitigate the impact of this crisis, ADB recommends governments limit energy subsidies to only the poorest households and affected industries rather than applying broad subsidies. It also advises reducing energy consumption and accelerating the adoption of alternative energy sources. Furthermore, cautious management of foreign currency reserves is urged amid the risk of declining remittances.

The report warns that this crisis highlights the vulnerabilities in energy security and foreign supply chains for Asian countries. Should the conflict persist, the economic stability of countries like Nepal could face even more severe setbacks.