By: media for freedom

Inflation in Nepal

Summary:

• The Year-on-Year (Y-o-Y) inflation rate as of mid-November 2009, according to Nepal Rastra Bank‘s (NRB) latest macroeconomic report, is 9.9%.
• Price index of food and beverage group up 16.4% while price index of non-food and service group up 2.2 % as of Mid-November 2009.
• The annual budget of the Ministry of Finance and the Monetary Policy report of the NRB has projected an inflation target of 7% for FY 2009/10
• After remaining in negative territory for over 3 months, Wholesale Price Index (WPI) based inflation in India as of Oct 17th, 2009 is 1.51 %.
• As economic activities improve in major global economies, inflation numbers are climbing globally.  

Inflation in Nepal

According to the latest macroeconomic report from Nepal Rastra Bank (NRB), the year-on-year (y-o-y) Consumer Price Inflation (CPI) moderated to 9.9% in mid November 2009. Though still high compared to international standards, after reaching the highs of above 14% on mid Jan 2009, inflation has moderated gradually during the last few months (see figure 1). The annual budget of the Ministry of Finance (MOF) of Nepal for 2009/10 and the monetary policy of the NRB has projected an inflation target of 7% for Fiscal Year (FY) 2009/10. The annual average inflation in FY 2008/09 was 13.2% which was higher than the target of 7%. In its annual monetary policy report, the NRB has indentified supply side constraints as the primary cause of the high inflation. 

Figure 1: The Year-on Year (y-o-y) inflation figure (Source: NRB)

Inflationary pressure, according to the NRB macroeconomic report, has been driven primarily by significant price rise of 16.4% in food and beverages group and a moderate rise of 2.2% in non food and services group. Despite a recent decline in inflation figures, the high price increment in food and beverage group is making an average consumer worse off whose consumption basket is predominantly tilted towards food and beverages side.

Figure 2: Breakdown of October 2009 Inflation numbers

Global inflation

Recently the Indian government has come out with a new guideline on disclosing inflation statistics to the public. According to the new guideline, Wholesale Price Index (WPI) based inflation figure will now be released on a monthly basis compared to previous weekly releases. As per the new guideline, the monthly WPI based inflation for October 2009 is 1.34% compared to 11.06% a year earlier.

In March 2009, the CPI based US inflation turned negative for the first time in 54 years reaching negative 0.38%. At the end of Oct 2009, the Y-o-Y inflation in US is still negative 0.20% (see figure 3 for details). Low inflation in major advanced economies is largely due to the economic recession from the fallout of the financial crisis of 2008 and remarkably low oil and other commodity prices. Experts however are divided over the outlook of the inflation in the United States. With the fed funds rate at the lowest bound possible, there is abundant liquidity in the US which could push up price levels. And because of the high unemployment rate in the US, the Federal Reserve is not in the position to raise the fed funds rate any time soon as a rate hike could kill the nascent US economic recovery.

Japan is fighting another deflationary spiral as inflation has turned negative for last eight months. According to Bank of Japan, Y-o-Y inflation fell by 2.2% during October 2009 due to decline in gasoline prices. In China, however, inflation has turned positive for the first time in a year largely due to massive credit expansion fueled by the Chinese government’s recent USD 500 billion stimulus plan. As a result Chinese industrial output rose 19.2% in November – highest expansion since 2007. Similarly, inflation in Euro Zone has also turned positive for the first time in seven months as price level in 16-countries Euro bloc climbed 0.6% in November 2009

Figure 3: Global Inflation numbers

Reasons for high inflation in Nepal

While the inflation rate is falling all over the globe, why inflation has been skyrocketing in Nepal is still a conundrum, and worrisome for policymakers and public in general. During the first half of 2008/09, global food crisis and huge increase in commodity prices were significant drivers of high inflation. However, despite sharp fall in commodity prices, we have not seen commensurate decrease in domestic inflation level. Officials at the Nepal Rastra Bank (NRB) and the Ministry of Finance (MOF) have attributed higher inflation to supply constraints emanating from energy crisis, constant strikes and bandhs and carteling among businessmen.

Figure 4: Annual Remittance for last 5 years (amount in Rs. Billion)

These supply-side factors have played major role in pushing the prices up, however, going forward if the NRB is not able to soak up the excess liquidity in the market then inflation might further creep up especially with a larger government expenditure programs. Domestic economy has been inundated with record remittance inflow – Rs 210 billion in FY 2008/09 (See figure 4 for details). Though there is no formal research on the uses of remittance inflows in Nepal, anecdotal evidence shows that most of the remittance income has been used up for consumption purpose. Even if the remittance incomes are used predominantly in consumption, they can be productive provided that higher consumption, through multiplier effects, leads to expansion of production.  However, manufacturing sector has not been able to pick up in Nepal (In FY 2008/09, the manufacturing sector witnessed a decline of 0.5%). Given the above background of elevating remittance inflows and shrinking and stagnant production sector, one can argue that remittance has also been instrumental in driving up the price levels.

Figure 5: Annual average CPI based inflation for last 5 years

In these contexts, the inflation target of 7% in FY 09/10 might not be unattainable.  On the monetary side, the NRB, with the view of containing inflation, has put a lower projection on the growth of M2 – broad money- of 17% in 2009/10 compared to 21% in 2008/10.

Please contact the following for further queries and details:

Nepal Investment Bank Limited
Research and Development Department,
Durbar Marg, Kathmandu, Nepal

Source:Spotlight.

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