| March 21, 2018

Disaster inflation

On April 25, a massive earthquake struck Nepal. Since the initial earthquake and hundreds of aftershocks, there has been a wave of activity in Kathmandu. International search and rescue teams have come and gone, new NGOs and agencies are opening up left, right and center. The strong and seemingly long term response from the international community has so far been encouraging.

Nepal is currently awash with experts on all things from sanitation, engineering and geology and a wide body research is being conducted into the wider sociological impacts of the earthquake. Efforts are also being made to ensure the rebuilding is both comprehensive and inclusive. However, one component of the rebuilding and rehabilitation project that seems to have been neglected is the effect of Disaster inflation.
Since April 25, billions of dollars have flooded into Nepal in grants, donations, projects and loans. This money naturally is essential to fund the rebuilding and saving lives. However, this unprecedented amount of capital influx will bring challenges. The negative effects of huge amounts of capital coming into a country where the Gross National Income per capita is US $730 (2014, World Bank) have not been properly analyzed.

To ensure the rebuilding and reconstruction of Nepal is done to the highest standard it is natural to want the most qualified and experienced to lead the recovery effort, and this costs money. Industry experts command, and deserve high salaries; however, the arrival of all this money will inevitably be felt all over Nepal's economy. What needs to be taken into consideration is the inflationary effect this will have not just in Kathmandu, but especially district headquarters where there are often shortages of suitable office spaces.

With large organizations looking for offices, and a lack of suitable places due to earthquake damage, it has become a bidding match, a match that locals will never win. From stories all over Kathmandu of tenants being forced to pay more rent, to major organizations sub-leasing their offices to INGOs, people are cashing in on the flood of capital to Nepal.

The problem this has is that people, who have suffered in the earthquake and may have lost their livelihoods or lifesavings, have to compete with international actors who can afford to pay over the odds for an office. For many people involved in tourism or industry their work has dried up, leaving them struggling to pay the initial rent, let alone the inflated one. Thus people are being forced out of their homes by the very people who came to Nepal to help. This negative effect may well be unintended, but that does not diminish the damage it can cause. It has not just increased rent prices but also prices of items essential in the rebuilding, from building materials to tin sheets.

Nepal's economy was hardly flourishing before the quake, with a growth of four percent. There will inevitably be further struggles following the quake. Nepal has seen inflationary instability in recent times, with rates rising from 4.2 percent in 2007 to 14 percent in 2009 and back down to seven percent before the earthquake. Any long-term comprehensive rebuilding plan needs to take into account and address the issue that disaster inflation may bring.

This problem has been seen and documented elsewhere, in Cambodia in 1992 following the deployment of the United Nations Transitional Authority in Cambodia which was tasked with rebuilding. Rampant inflation severely impacted the already struggling Cambodian economy. While UNTAC did manage to organize and run elections in Cambodia, the most immediate change was the increase in the number of shiny new white Toyota Landcruisers on the streets of Phnom Penh.

William Shawcross claims that the influx of international actors with massive developmental budgets didn't directly benefit the population but instead "it caused serious inflation, which made life even more difficult for the poor... there was social dislocation and a big rise in prostitution and AIDS cases". In more recent times the failed economic recovery and rebuilding of Haiti has become a constant reminder on why the economic aspects of the recovery here in Nepal need to be carefully managed.

My point is not to criticize or take aim at the huge rebuilding projects taking place in Nepal. They are vital and for many the only real hope of lasting change. However, to ensure we don't increase the hardships faced by those in need, we need to ensure inflation doesn't price them out of their own economy. It is impossible to know the real effect and consequences on inflation this early; only one thing is for certain. The influx of huge sums of international aid will have an impact on Nepal's economy. Whether it will be positive or negative remains to be seen.

The author is a post-graduate student in Kathmandu
Max Mørch

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