MONETARY POLICY
Inflationary Pressures

External situation compounded by growing conflict in Middle East along with internal pressures could further push inflation

By SANJAYA DHAKAL

The spiraling Middle East conflict is likely to have not only humanitarian but also economic implications for Nepal . While the immediate concern may go out to the stranded Nepalese workers in Lebanon , some of whom have returned already, in the coming weeks the conflict could spell another round of hike in the price of crude oil in the international market triggering tremors all around the world including Nepal .

Vegetables in market: Soaring inflation hits consumers

Already, the price of crude oil has crossed $76 per barrel. It could further escalate if the conflict in the Middle East grows.

On the backdrop of the war in Lebanon , Nepal ’s economy could land in extremely difficult situation as further increase in oil prices – which appears inevitable – could push the inflation rate to the double digit figure and shake the foundations of macro-economic stability.

Since past two years, controlling the rate of inflation has been the major preoccupation for the central bank. As a result, when the Nepal Rastra Bank (NRB) released its monetary policy for the fiscal year 2006/07 last week, it laid a strong emphasis to control rising inflation.

This year, the central bank aimed to keep the rate of inflation to 6 percent. But given the rapidly deteriorating external as well as internal situation, it would be almost impossible to attain the target. Last year, too, the central bank had vowed to keep the rate at 5 percent but it could do nothing to check the rise of the inflation rate, which now stands at 9 percent. The fear of double-digit inflation is ominously close now.

The unabated rise of price of crude oil in the international market; subsequent hike of fuel prices in the domestic market accompanied by cascading effect of price rise in all consumer goods and transport fare; growth of unproductive expenses; decline in development expenditure are some of the major causes for triggering rate of inflation.

As none of these causes are likely to be adequately addressed anytime soon, it is anybody’s guess whether the rate of inflation would head north or south in coming months.

The growing petro prices have become the major headache for the government. At present, the state-owned Nepal Oil Corporation (NOC) is incurring Rs 20 million of loss daily. According to NOC, there is loss of Rs 9.9 per liter in petrol at the current selling price. Losses in diesel, kerosene, aviation fuel and cooking gas stand at Rs 11, Rs 8.21, Rs 5.8 and Rs 189.25 (per cylinder) respectively.

Unveiling the monetary policy, Governor of NRB Bijaya Nath Bhattarai said that his number one objective is to strike a balance between economic growth and rate of inflation.

“It is a nice thing that the central bank plans to bring down the rate of inflation to 6 percent. But due to combination of some external and internal factors, it will be difficult to achieve the target,” said Dr. Tilak Rawal, former governor of the central bank.

Dr. Rawal pointed out the unabated rise in the price of crude oil in the international market as the major external factor likely to impact on our rate of inflation. “That apart, the fact that we need to spend resources in unproductive sectors like holding of election of constituent assembly, and subsequently that of parliament, would further push the inflation rate,” he said, adding, “In this situation, I can only wish luck to the NRB.”

In case the inflation continues to head north, the people will have to suffer a lot especially when the rate of GDP growth has almost stagnated since past few years.