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ECONOMY
Struck By Inflation
The rapidly growing rate of inflation threatens to upset the macro-economic stability that had been largely maintained in the last five years despite the escalating conflict and deepening political instability. At a time when the economic growth rate has fallen sharply, the growing inflation threatens to hit at the economic fundamentals. The repeated hike in the price of petroleum products and increase in the rate of Value Added Tax have been primarily responsible for the sudden northward movements of the inflation rate. Already the central bank had estimated over 7 percent inflation rate this fiscal year. Now with the latest increase in price of fuel, inflation could further increase hitting the poorer sections of Nepalese society in the worst manner. For a common man the rising inflation coupled with static growth means that his earnings will not increase even as the market prices will rise – a recipe for larger economic disaster
By SANJAYA DHAKAL
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A shopkeeper : Market down |
After seemingly maintaining macro-economic stability despite huge challenges posed to the economy by violence and instability, the past few months have indicated a scary future. Coming at a worst time possible, the spiraling rate of inflation threatens to upset the fragile economic stability.
The fear of double-digit inflation coupled with stagnant growth is now real. The latest economic report – of the first five months of current fiscal year - released by the central bank states that the rate of inflation (National Consumer Price Index) has increased by 8.8 percent. Likewise, the National Wholesale Price Index has increased by 12.9 percent. These two rates stood at around 4 percent a year ago.
The Nepal Rastra Bank (NRB) officials have already predicted over 7 percent inflation rate in the current fiscal year. This could well increase given the recent hike in the price of petroleum products. The NRB officials have predicted that the recent increase in price of petroleum products would increase inflation by 0.7-1.82 percent more.
News reports have quoted Keshav Acharya, chief of the research department at NRB, as saying that the increase in the price of kerosene would trigger the rise in price of consumer goods by 1.81 percent. The increase in the price of kerosene and petrol would add 0.88 percent and that of diesel 1.83 percent to inflation.
Therefore, even without further increases in fuel price, this fiscal year is now certain to witness over 8 percent inflation on average – which is the highest inflation in the last seven years.
This time, however, the increase in inflation has more scary consequences. As the government’s expenditure is growing without corresponding growth in revenue and as the economic growth is slated to remain largely static, the spiraling inflation could eat into the vitals of economics.
For a common man this means that while his earnings are not going to increase at all, the market prices will soar posing him with sundry difficulties in maintaining his family budget. Combine this with the deteriorating security situations, calls for strikes and blockades and live possibility of further rise in fuel price and you will end up with one hapless consumer wrecked by frustrations.
Doom Sayers
Some prophetic economists have already predicted dire consequences forecasting that the country could become bankrupt within three months. Dr. Raghav Dhoj Pant, executive director of Institute for Development Studies (IfDS), raised hackles a few weeks ago by making the grim prophesy.
In the first week of February Dr. Pant warned “the current government and political parties of ‘stagflation’ which is already bleeding the economy, due primarily to unresolved political problems and lack of initiatives by the Nepal Rastra Bank (NRB), Ministry of Finance (MoF) and National Planning Commission (NPC).” He stated that while per capita income is stagnant, prices are rising and the balance of payment problem with major trading partners is deteriorating. He warned that the economy ‘might collapse abruptly.
Even though there may not be many supporters of Dr. Pant’s deadline of economic collapse, most agree with the problem he has pointed at.
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Transportation : Fare is likely to increase |
“The growth of inflation is a serious problem especially when the earnings of people have not increased,” said Dr. Puspa Raj Rajkarnicar, director of Institute for Policy Research and Development (IPRAD). “However, I am not sure that the government will just collapse due to inflation only.”
According to Dr. Rajkarnicar, if the government approaches bankruptcy it could always fall back on Nepal Rastra Bank (NRB) for overdraft. “Although there is a strict limit of overdraft that the government may borrow – not more than one percent of GDP – if things turn really nasty, the government will borrow more. So, I do not see the economy collapsing even though the problems are grave,” he added. In the early 1990s, too, Nepal had suffered from high inflation that reached even 21 percent. “But the handsome growth rate then had upset the negative impacts to a large extent,” said Dr. Rajkarnicar.
Even Dr. Rajkarnicar, however, sees the coming days as being further problematic for Nepali economy. “The latest fuel price hike, the possibilities of further hike and excessive borrowing from NRB could all force inflation to rise further,” he predicts.
The government, on the other hand, does not seem much worried about the inflation. Immediately after Dr. Pant came out with his prophecy, Minister of State for Finance Dr. Roop Jyoti blasted his report. “It is confusing, sensational, politically motivated and totally wrong,” said Dr. Jyoti. He went on to clarify that the revenue collection, remittances, government expenditure, foreign exchange reserve and inflation were all under control.
“In the first six months of the current fiscal year, the government collected revenue totaling over Rs 31 billion, which is more by Rs 1.75 billion than the amount collected during same period previous year. Likewise, the central bank has Rs 146 billion worth of foreign exchange reserve,” said Dr. Roop Jyoti.
Economic Slide
The report by the central bank on the state of Nepali economy during the first five months of the current fiscal year has indicated alarming situation not only in inflation but also in the government finance sector where the fiscal deficit is growing. Excepting the existence of Rs 2.65 billion in the accounts of local bodies, the fiscal deficit touches 10.5 percent of the total government expenditure.
The freeze in capital expenditures have led to significant rise in fiscal deficit, the bank stated. The total government expenditure has increased by 12.8 percent – compared to less than 10 percent during the same period previous year. However, the state of revenue deficit (total revenue minus current expenditure and principle payment) has slightly improved. In the review period, the revenue deficit reached 5.7 percent compared to 7.6 percent last year. The revenue mobilization has increased by 9.8 percent during the period – which is still less than the target of over 13 percent growth.
In foreign trade, the growth in exports have declined while imports have increased. Total exports have grown by 6.8 percent in the review period – compared to 13.2 percent growth in the same period previous year. On the other hand, imports have continued to grow. Compared to 10.4 percent growth previous year, this year has seen imports grow by 14.8 percent. Trade deficit has expanded by 20.2 percent. The total foreign exchange reserve is Rs 140 billion – more by 7.8 percent compared to last year.
“Another disturbing trend is that in the last few years, our exports have begun to re-concentrate in India ,” said Navin Dahal, executive director of South Asia Watch on Trade, Economics and Environment (SAWTEE). Despite attempts to diversify Nepal ’s foreign trade, almost two-third (66 percent) of the country’s trade is still conducted with India .
In the revenue collection front, too, the progress has been unsatisfactory as pointed by the half-yearly revenue analysis by the Ministry of Finance. Due to internal conflict and instability, the collection of revenue has been short of target by ten percent. In the first six months of the current fiscal year, Rs 31.58 billion revenue was collected – which is 5 percent higher than the last year’s collection of Rs 29.83 billion during the same period, but is still short of the target of Rs 34.95 billion. The growth rate of revenue at 5.8 percent is lesser than the growth rate of current expenditure, which is growing by 15 percent.
The Ministry of Finance report adds that when the inflation rate of 8 percent is adjusted, the net revenue growth rate becomes negative. The Value Added Tax (VAT) collection did increase by 23 percent during the period. However, the VAT collection is less than the increase in the VAT rate, which was hiked by 30 percent (from existing 10 to 13 percent). Even the collection of custom revenue could be affected this year as the government has cut down tariff rates.
Recent report by the Central Bureau of Statistics (CBS) has showed that Nepal ’s GDP growth rate in the fiscal year 2004/05 has gone down by 1.21 percent compared to previous fiscal year, thanks to weak agricultural growth rate, low capital formation and dismal performance of non-agricultural sectors. In the fiscal year 2004/05, the GDP growth rate remained at 2.33 percent compared to 3.54 percent in the last fiscal year, which is lower than the government’s target of 4.5 percent even in a normal case scenario, according to a fresh yearly revised estimates by the CBS. During the period, agricultural growth rate stood at only 2.97 percent compared to 3.86 previous year. Likewise, non-agricultural sector grew by 2.07 percent during to the period compared to 3.42 percent a year ago.
In the decade of 1990s, Nepal ’s annual economic growth averaged around a healthy 4.9 percent but the escalating insurgency saw this drop to an average of 1.9 percent between 2002 and 2004. “Given that this conflict is persisting, and that there are chances it might actually deteriorate, Nepal could lose significantly more than two percentage points of GDP per annum,” said Sultan Hafeez Rahman, representative of Asian Development Bank (ADB) to Nepal recently.
With 31 percent of the population living below absolute poverty line and with an average income of just less than $300 a year, the troubled Himalayan Kingdom cannot afford this loss. Nepal needs to get economic growth and poverty eradication back on track, and this cannot happen without peace, Rahman told AFP news agency recently. The solution is simple, according to Rahman, a credible peace dialogue would restore investor confidence and boost markets. “Once this happens, I think that economic activity will tick back. In a very short period of time it can reach growth rates of six percent or more and if they are serious, over a time horizon of maybe 15 years, they can do as well in per capita terms as any South Asian country.”
Dr. Rajkarnicar also agrees with his viewpoints. “The economic problems of the country has solutions in the resolution of political problem. Once we have peace and stability, the tourism and hydro resources alone will help us get back on track,” he added.
As such, the economic problems of the country may not be solved soon as the political situation appears to be deteriorating. The economy, however, provides one more reason why the legitimate political actors of this country must reconcile sooner than later if only to provide a succor to the teeming millions of poor people.
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