Alarm Bells Ringing
One of the most pertinent indicators of the macro-economic stability, the rate of inflation, is showing dangerous trends of late. Because of its centrality, economists keep a close tab on the movement of inflation rate. And they are beginning to view with trepidation the recent northward rush of the inflation. Within past seven months, the rate of inflation has increased from 5.5 to 7.2 percent, say economists. This, according to them, does not augur well for the economic stability of the country at this critical juncture. The problem of rising market prices of essential goods has been exacerbated by the acute shortage of fuel. The unchecked inflation threatens to wreck the fundamentals of economy
By SANJAYA DHAKAL
Maya Gurung is a worried lady. Scouting the Kalimati Fruits and Vegetable Market – the largest wholesale market in the capital – for daily essentials, she is distressed by the sky-rocketing prices.
"For middle class and lower middle class families, the soaring market prices of vegetable and other foodstuffs have become number one problem," she said.
"This problem affects us the most as we are faced with day-to-day crises in our homes," Gurung said.
Added Sumnima Jha, a housewife from Kalimati. "Prices of everything have increased. Earlier monthly budget of around Rs 2 to 3 thousand were enough to buy these essential goods. These days, it costs us over Rs 5 thousand," she said.
Jha quipped at the lack of attention towards this plight faced by the common people of the country. "Everybody talks about election and election. Nobody is paying attention to these issues." She rues the continuous attention on politics, which, she says, is affecting the socio-economic situation in the country.
The surging inflation has destabilized the household budget of the middle and lower class families in the country.
"More than the prices of vegetables, the prices of essential foodstuffs such as rice, pulse, wheat and spices have increased," said Janardan Acharya, a shopkeeper from Bhaktapur.
"If you compare the prices of rice and pulses, you will be amazed to find how quickly they have increased," he said.
Apart from foodstuffs, the prices of fuel have also increased creating cascading effect. Besides, time and again, due to sudden and prolonged disruption in supply mechanism, the prices of goods increase.
All these hikes have hit the wholesale consumer price index, which the central bank calculates by studying the market situation in dozens of urban centers across the country.
Impact On Economy
Economists have warned that the rate of inflation could surge ahead breaking all past records in the recent years.
This fiscal year's (2007/08) budget had estimated that the rate of inflation would hover around 5.5 percent.
However, within last seven months, the rate has raced past 7.1 percent.
A renowned economist and a member of board of directors of Nepal Rastra Bank (NRB) – the central bank – Dr. Bishwambher Pyakuryal fears that the unchecked inflation would be hurting the economy very badly in coming days.
He said that the rise in the price of petroleum products in the international market and tremendous growth in government expenditure has created big inflationary pressures threatening to destabilize the nation's macro-economic situation.
"In such a short period of the current fiscal year, the inflation rate has increased from 5.5 percent to 7.1 percent. This indicates that the trade deficit and budget deficit of the government will now increase astronomically. This will also affect government's resource allocation in the budget. Besides, the government will now not be able to invest in social sectors and it will not be able to provide relief to the countrymen. The quality of lives of common people will deteriorate further and the nation will truly head towards the direction of failed state," warned Dr. Pyakuryal.
Apart from the disruptive effect of prolonged bandh He also points at the ubiquitous effect of Indian economy on Nepal. If Indian economy catches a cold, Nepalese economy suffers from pneumonia.
"If the Wholesale Price Index of India increases by ten percent, rate of inflation here increases by 4.7 percent. But, if narrow money supply is increased by 10 percent here, our inflation increases only by 4.3 percent. This means that more than our money supply, our inflation is affected by fluctuation in India's wholesale price index," Dr. Pyakuryal added.
Surging Expenditure
One of the reasons creating inflationary pressures is the soaring expenses of the government, according to Dr. Pyakuryal.
The upcoming Constituent Assembly election, the increased need for spending in security arrangement, upkeep of Maoist cantonments and rising trend of government compensating people for various reasons have propelled the regular expenditure of the government.
For the purpose of holding CA elections alone, the government has allocated over Rs 6 billion – including for ensuring security arrangement. Likewise, the 23-point agreement reached among the seven parties, too, have created additional financial burden on the government.
"Nepal perhaps never felt the greater need for external financial assistance than what is being felt, at present. And, I think, this is perhaps the most important time that our development partners can come forward with generous support," the Finance Minister Dr. Ram Sharan Mahat had told the donors, a month ago just after the signing of the 23-point agreement.
However, despite such requests, the government, however, could not get enough commitments from the donors. The government had requested the donors to provide US$ 47.8 million (over Rs 3 billion). But, as Finance Secretary Bidyadhar Mallik, revealed, they have only given commitment to provide around US$ 30 million (less than Rs 2 billion).
According to the Finance Minister, the Nepal Peace Trust Fund (NPTF), which was created to mobilize international resources for facilitating the peace process, at present, has "far too limited resources to meet our current and imminent requirements, which as per the current estimates stand at about 5.04 billion Nepalese Rupees (equivalent to USD 81.3 million). NPTF currently has external commitments available to the tune of USD 17.4 million. The shortfall, therefore, after government's own commitment is about 47.8 USD million."
While the officials at the Finance Ministry rush to pat each other's back at the outstanding growth of revenue by over 26 percent despite the turmoil in Terai, they try to under-play the spiraling growth in regular expenditures – which are growing at over 40 percent.
"The growth in government expenditures is far ahead than the revenue growth," said Dr. Pyakuryal.
Role of NRB
Dr. Pyakuryal is also worried about the tendency to overlook the central bank in maintaining fiscal and monetary stability.
"It is the major task and duty of the central bank to keep the inflation under control but the situation is such that there appear to be many central banks above the NRB. There are different government agencies and high-level committee that work above the NRB. The NRB has all the information and knows what should be done but it is not authorized to do the needful," he quipped.
At a time when the economic growth rate of the country is stagnating at around 2 percent, the rush of inflation rate towards double digit is a worrying sign.
