Rising inflation poses challenge for economy

The already tattered Nepali economy, full of potholes, now has a new challenge to confront with: rising inflation.

The central bank's statistics for the first three-quarters of the current fiscal year reveal that inflation scaled up to 8.9 percent, which is over three-percentage points more than the target set by the monetary policy.

Nepal Rastra Bank (NRB) officials say that rising food price is the major factor that inflate the national inflation index. According to the latest price data, the price of food and beverages, which commands a 53.2 percent weight in the National Urban Consumer Price Index, recorded a whopping rise of 12.6 percent. The inflation for the food and beverages group during the first eight months was 9.4 percent.

Key economic factors suggest there is almost no way to avert the pain of double-digit inflation. Given the market trend, chances are high that the prices of food items may rise further, which may lead the month-to-month inflation to cross the single-digit mark by the end of the current fiscal year, says Dila Ram Subedi, assistant director at the Price Division of the central bank.

The central bank's statistics further reveal that the prices of rice, and oil and ghee, which together hold more than 20 percent weight in the urban consumer basket, recorded a rise of 25 percent for rice and 33 percent for oil and ghee. It is extremely worrisome that the country is witnessing a painful price rise in agro-based products at a time when it enjoyed a record 10 percent rise in agriculture production this year.

NRB officials also point out that continued domestic oil price suppression despite a 60 percent rise in global oil prices has also helped contain the inflation within the single-digit. Had the government adjusted domestic oil prices at par with global prices, domestic inflation would have touched 15 percent, added Subedi.

Leading experts view the current inflationary pressures combined with low growth rate of around 3.5 present represents initial indications of stagflation, an economic condition of rising prices, high unemployment and slow growth.

“There has been sustained price rise, albeit with declining output which means growth will shrink in the coming days. Since investments are shrinking, the unemployment situation will deteriorate,” Professor Bishwambher Pyakuryal told the Post explaining how the economy portraits a gloomy outlook.

Amidst this rising concern, there is still worse news: the Nepal Rastra Bank, whose prime objective is to maintain price stability, has done virtually nothing to contain inflation.

"Since the present inflation is the output of supply constraints rather than high demand, there are a few things the central bank can do control it," said Sebudi. Professor Pyakuryal also agrees with the argument but added that a careful combination of monetary and fiscal policies can contribute to put agriculture production in a higher growth trajectory, helping curb agflation, a term coined to represents inflation fueled by agricultural commodity prices.

Source: eKantipur