Suffered by Gyanendra and Guerillas, Nepal Gets Inflation Headache

While former autocrat Gyanendra and Maoist Guerilla are stealing all the attention for all bad reasons, here comes yet another bad news for Nepal. The central bank says inflation stood at seven percent in the first six months of the current fiscal year where as the economy is expected to grow by 3.8 percent.

Central bank of the country, Nepal Rastra Bank (NRB), yesterday released the mid-term review of Monetary Policy, which leaves all monetary measures unchanged, giving up on efforts to curb rising inflation. Reckoning that inflation is spurred by supply factors including rise in prices of food items, the Policy concluded that taming inflation was not possible only through monetary means In the present context, it is not necessary to change monetary instruments for the purpose of containing inflation, states the Policy.

“Private sector’s investment has not picked up. The government’s expenditure remains contained. As a result, the aggregate demand of money is low. This justifies that money supply does not have any contribution to push up inflation,” states the Policy. The central bank has projected inflation based on consumer price index to grow to 6.6 percent this fiscal year, up from the earlier projection of six percent. Inflation stood at seven percent in the first six months of the current fiscal year.

The NRB has estimated that the country would see surplus of Rs 10 billion in balance of payment this year against the earlier estimate of Rs 16 billion. The central bank, in the mid-tern evaluation also stated that the rate of broad money supply (M2) will remain at 16 percent, the same rate as its earlier projection.

To further liberalize foreign currency transactions, the Policy gives a nod for commercial banks to provide exchange transfer facilities for up to US$ 2,500 for miscellaneous purposes. There has been simplification over the opening of letters of credit (LC) as well. The Policy introduced a provision to allow review of the LC on the basis of ‘already shipped documents.’

The economy is expected to grow by 3.8 percent this fiscal year due to slower-than-expected rise in capital expenditure, growing power load shedding and its subsequent impact on industries, states the Policy. Due to steep fall in paddy production caused by adverse weather, the Policy said that the agriculture gross domestic product would creep up by a nominal 0.7 percent. The Policy also envisages a plan to speed up the process pertaining to opening up the financial sector for foreign financial institutes. “The central bank has already prepared a study report over allowing branches of foreign banks to operate in Nepal allowing them to engage in wholesale banking transactions. Steps would be taken to implement the report,” states the policy.

In order to encourage banks to reopen their rural branches closed due to the conflict, the Policy states that contrary to the previous system, the banks do not need NRB’s prior permission. “They can just send information of resumption of the branches’ service to the NRB,” it said.
According to the Policy, the central bank purchased IRs 17.72 billion by selling US$ 390 million in the first six months this year to meet growing demand for Indian currency. Due to soaring trade deficit with India, the country has experienced paucity of Indian currency in recent periods.

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54 thoughts on “Suffered by Gyanendra and Guerillas, Nepal Gets Inflation Headache”

  1. Bhudai Pundit (for comments 01:03:00 and 06:48:45),

    Perhaps you are taking HDI as Holy Grail since it takes into account of social sectors instead of solely focusing on GDP and per-capita income data. It is also true that HDI is considered most ‘reliable’ measure of development. However, it is worthwhile to note that data that UN uses (to calculate index) is provided by the Nepalese authorities. There are strong possibilities that it may not truly reflect our situation since our data collection and disclosure mechanism cannot be quantified as qualitative and trustworthy. For instance, the Finance Minister recently presented the figure that revenue increased by 17 to 18% this fiscal year as compared to the last fiscal year (refer to latest issue of Himal magazine in Nepali). By revenue, it generally means collection or income through taxes. However, at the same time, when all the industries are hit by frequent lockouts and transport strikes, how the government revenue has increased? The agriculture sector has hardly performed because of displacement of farmers from their landholdings, the Maoists’ threats and continuous migration to seek foreign employment opportunities. Moreover, agriculture in Nepal depends on favorable weather conditions rather than on modern agricultural techniques. But revenue increased in Nepal despite such adverse situation. The Finance Minister conveniently forgot to disclose that revenue of the government increased on account of foreign grants received for political settlement of the Maoists conflict, to build cantonment and other infrastructure, to conduct elections, and for the salary of the UN observers, etc. In such scenario, data presented by the government does not appear credible.

    At least, it cannot be empirically proved that Nepal can meet its own agriculture demand and even export. That is because our population is growing at 2.25% each year (2001 Census) whereas agricultural sector is growing at less than 1%. There is this gap that has not been filled. Secondly, fertile land or Terai is seeing rapid urbanization and migration from hills. Therefore, fertile land in Terai is increasingly being used for residential purposes rather than for agricultural purposes. Thirdly, when people migrate from hills, there is strong possibility that their landholdings in hills remain underutilized and not used for agriculture purposes. Fourthly, when we keep on decreasing size of landholdings (in the name of delivering social justice), then return on investment for farmer reduces drastically because of diseconomies of scale which discourages further investment in agriculture. Fifthly, as I mentioned earlier, we are using obsolete farming mechanism that does not help increase agricultural production. Sixthly, when able-bodied Nepalese seek employment opportunities abroad and India, there is already growing scarcity of the labor force to work even in the existing farmland. Seventhly, instead of agriculture, labor force looks at alternate employment opportunities (such as being unskilled labor in urban areas) since income from agriculture sector remains at sustenance level and unpredictable. Of course, the Maoist threats of abduction, extortion, forceful eviction in rural areas are real, which becomes very strong deterrent for agricultural sector.

    However, I do agree that if we are able to concentrate on agricultural sector with appropriate structure and investment, it helps contain inflation to considerable extent. Research indicates that if we can increase agricultural output, it has strong contractionary effect on the Nepalese inflation.

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  2. The Govt has not done anything for the improvement of agriculture:
    In the name of land improvement they have only imposed land celings.
    Mahendra did it in 2021 bs : 28 bighas in terai
    Deuba in 2060: 11 bighas in terai
    Now rumors are some one will do it again.: about 5 bighas in terai
    For a farmer to use mechanical means (like tractor, harvesting machines, etc) there must be sufficient land, about 30 – 50 bighas, otherwise it is not feasible to use machines. Without machines, productivity will not increase.
    Our political parties only look at kathmandu and for them other parts of the country is not nepal. When setting land celings they only look at kathmandu, the leaders must realize that cost of 25 – 30 bighas of land in terai is much less than the cost of char anna of land in kathmandu valley. The land celing should be based on valuation of the land and not on area. This way maybe we will be able to restore some equality in income distrubution. The other aspect for increasing productivity, is that the govt should immediately go in for heavy decentralization. Even for a minor work people have to come to Kathmandu. This must be discouraged.

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  3. Prayatma:
    Good points. To have a functional democracy I think two things are important. You need leaders and people who love their country and wish to work for the walfare of their country. Our leaders obviously don’t pocess these vitues – they would sell their motherland for a Pajero. The other problem I see in Nepal are the Nepalese themslves. You have to understand why the post 1990 era was not as successful besides the incompetancy of the political leaders. I think a significant part of the failure also lies in the people. Perhaps its due to illiteracy or the fact that Nepalese came out of years of autocratic rule but we are also to blame since we did not DEMAND accountability from our leaders. It takes alot alot of time for people to be acustomed to a democratic mindset where they take responsibility for the performance of their leaders. And I don’t think we did this enough. I agree we do need a new generation of leaders but its hard to see that kind of potential in the future – at least I don’t.

    Shaman:
    UN HDI may have come fallacies but its about the most reliable indicator for measuring social well being. Maybe some of the numbers are inflated but I think between 1990 – 1996 (before insurgency) there were some good developments in terms of development in rural areas. For example the VDCs were starting to take some effect etc.
    With your comments with regards to agriculture I agree there are problems. But its largly because there has been no effort to develop our agricultural sector. Like you mentioned we need land reforms and improvement in farming techniques. But such develpment requires political leadership (especially land reform) and unfortunetly we don’t have any.

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  4. Yes, Nepal did suffer from Gyanendralitis or whatever you want to call it. Actually, gyanelitis is only a milder version of something Nepal experienced for the last two hundred years, Shahdyanastilitis, and its time to get rid of it once and for all.

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