Historical Overview of Inflation in Nepal
The price level and its growth, inflation, is an important
economic indicator. There are various indices which measure the price level,
such as; consumer price index (CPI): wholesale price index (WPI); sensitive
price index (SPI); gross domestic product (GDP) deflator and so on. In Nepal,
there are three main price indices, namely: the CPI; the WPI; and the Salary
and Wage Rate Index (SWRI). 4 The main focus for measuring the cost of living
is placed on CPI. This is because CPI measures inflation impact which is the final measure of prices on
households. This chapter, therefore, overview the historical development and
trend of CPI in Nepal. The chapter is broken down into three sections: the next
section discusses the composition and structure of CPI in Nepal followed by
historical perspectives of inflation and
decomposition of inflation trends.
NRB is the domestic authority which collects price information
and construct CPI index.5 The CPI index captures the average household's
consumption basket. This basket is determined by national level Household
Budget Surveys (HSB). The objective of the survey is to make more representative
basket in terms of cities, markets, items and weights for different
commodities, income and occupation of the people.
Inflation in context of Nepal
Since
some years back, Nepal is suffering from the rapidly growing inflation because
of many economic and political factors. The necessity of spurting economic
growth is essential for Nepal, a land-locked least developed country in south
Asia. Nepal Rastra Bank report has said, Inflation in Nepal is showing no signs
of easing even though the wholesale price index touched a 30-year low in
neighboring country India, on which the Nepalese economy is heavily dependent.
After having low inflation averaging 3.6 percent from 2000 to 2005 Nepal Rastra
Bank (NRB), the country’s central bank, has come up with a staggering 13.5%
inflation figure - a demoralizing fate while people are cash-strapped and
having to succumb to decaying income and loss of jobs.
Year
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
Rate(%)
|
7.8
|
8.6
|
6.4
|
7.7
|
13.2
|
9.3
|
9.9
|
10%
|
Consumer Price Inflation
The
y-o-y inflation as measured by the consumer price index increased
by 7.5percent in mid April 2012 as compared to 10.6 percent
in the corresponding period of the previous year.
Commodities
|
April
2011
|
April
2012
|
Food and beverage
|
17.3%
|
21.9%
|
Non-food
and service
|
5.3%
|
10.1%
|
Ghee
and oil
|
5.3%
|
15.6%
|
Milk
product, and egg
|
16.3%
|
12.5%
|
Hotel
and restaurant
|
15.2%
|
12.5%
|
Vegetables
|
61.1%
|
10.9%
|
Hard
drinks
|
2.1%
|
9.2%
|
Tobacco
products
|
9.0%
|
17.1%
|
Meat
and fish
|
8.0%
|
6.4%
|
Spices
|
21.1%
|
12.3%
|
Cereals
products
|
13.4%
|
3.0%
|
Transport
|
17.8%
|
11.4%
|
Clothing
and footwear
|
16.9%
|
15.1%
|
Furnishing
and household equipments
|
8.3%
|
13.6%
|
Miscellaneous
goods and services
|
5.7%
|
10.8%
|
Region-wise, the
price indices in Hill increased by 8.4 percent followed by Terai 7.8 percent
and Kathmandu Valley 6.4 percent during the review period. The respective
increment rates were 11.9 percent, 8.2 percent and 12.9 percent respectively in
the corresponding period of the previous year.
This data can
also be graphically represented as below:
Wholesale Price Inflation
The y-o-y wholesale price index increased by 6.6
percent during the review period compared to a rise of 11.5 percent in the corresponding
period of the previous year.
Commodities
|
April 2011
|
April 2012
|
Imported commodities
|
8.8%
|
14.3%
|
Domestic manufactured
|
9.1%
|
8.1%
|
Agricultural
commodities
|
13.9%
|
2.0%
|
Fruits and vegetables
|
28.9%
|
17.1%
|
Cash crops
|
9.3%
|
3.6%
|
Livestock production
|
12.7%
|
13.7%
|
Spices
|
41.0%
|
18.4%
|
Food grains
|
12.8%
|
3.1%
|
Under the group
of domestic manufactured commodities, the wholesale price indices
of food-related products and beverages and tobacco increased
by 12.8 percent and 7.1 percent respectively during the review
period .Likewise, of construction material increased by 6.1 percent
during the review period. Within the imported commodities group, the wholesale
price indices of petroleum products and coal and textile-related products increased
by 27.8 percent and 25.0 percent respectively during the review period. The
price indices of electric and electronic goods, and transport vehicles, and
machinery goods are increased by 12.3 percent and 7.0 percent respectively
during the review period.
Negative inflation
When
most of the countries in the world are bracing themselves to face the
challenges of the crisis, Nepal is experiencing an all time high inflationary
situation. This is extremely worrying. If the figures published by Nepal Rastra
Bank (NRB) and the survey carried out by the World Food Programme (WFP) in
collaboration with other institutions are to be believed, prices are not only
high but rising rapidly at the rate of 14.4 percent.
According
to a survey of the market, coarse rice is being sold at Rs. 40 per kg, pulses
at Rs. 85 and edible oil at Rs. 150 in Kathmandu and food items are costlier in
the remote districts of the country. However, inflation affects different
groups differently. Actually after Jan
Andolan II, the general
public had anticipated a corruption-free economy and price stability. However,
the NRB, in its latest report, says that prices are still on the rise.
Consequently, it will rob the poor while allowing the rich to get richer. Fixed income
groups are the worst sufferers because their wages or salaries lag far behind
the rising prices. A sizable segment of the general public, excluding, of
course, the profiteers, believe that the existing rising prices are the result
of a syndicate formed by the transporters and a cartel imposed by specific
groups within the economy. Thus the popular view is that the current situation
of price rise is primarily a problem of the poor and middle class, and it has
been created by profiteers and hoarders.
Price Inflation
The annual inflation in
2010/11 is estimated to have remained at 9.6 percent. Wage rate increased
substantially in the review period. The salary and wages index increased by
24.8 percent in mid-May 2011 compared to 13.0 percent in the corresponding period
of the previous year. Under salary and wages index, the wage index increased by
32.8 percent. Among the components of wage index, index of agricultural labors,
industrial labors and construction labors increased by 43.7 percent, 14.1
percent and 27.9 percent respectively.
Increasing trend in
labor export has pushed the cost of production of both agricultural and
industrial production on the one hand and cost of fund has also increased on
the other. Lingering political transition, weak labor relation, power crisis,
inadequate physical infrastructure, lack of investment-friendly environment,
lower capital expenditure by the government and structural bottlenecks of the
economy are the sources of low productivity.
Causes of Inflation in Nepal
The causes of inflation
in our country considering the current situation are as follows:
Ø Political
Insurgency:
the volatile political situation has played a vital role in the increment of
all commodities. The impractical government amended rules and regulation have
helped to make the situation worse. The unclear motive of government regarding
economic sector also has caused the living standard of the normal citizen to
degrade.
Ø Pressure
tactics:
Maoist party in particular has badly hampered the economic activities of the whole
country. The illegal donations, shutdown of major industries had created an
imbalance in the demand and supply of goods and services.
Ø GDP and Per
capita income in decreasing trend but increase in price level: The GDP of
Nepal is in decreasing trend whereas the price level is increasing yearly. As
per the National Income view, the contributions to GDP have major impact on the
economic aspect of the country. The increasing levels of prices add fertilizer
to the increasing rate of inflation.
Ø Natural causes: Due to flood
and landslides that took place a month ago has also helped in increasing the
inflation rate. The agricultural lands have been degraded due to natural
calamities.
Ø Growing concrete
jungles:
At present time all we see around us are concrete buildings. Fertile lands have
been used for real estate purpose. If this trend goes on for a long time, we
can clearly predict that the inflation rate is undoubtly going to rise
especially for food items.
Ø High labor cost: The prices of
items are also high because of the labor costs is very low mainly in terms of
people who get paid on daily basis.
Ø Transportation
charges:
Transport entrepreneurs have ganged up to overprice transportation costs
because of rise in price of petroleum products.
Ø Price of petroleum
products: Price
of petroleum products has been adjusted several times on the higher side. Such
adjustments helped pushing the cost of freight and carriages and cost of other
goods and services.
Ø Transmission
through trade: Furthermore,
rising inflation in India is transmitted in Nepal through trade, which is one
of the significant factor of increasing inflation rate of Nepal.
Ø Seasonal
constraints:
Seasonal constraints also prompted to push the inflation up in the past. For
example, price rise on sugar and sugar made products, vegetables, fruits etc.
Unnoticed causes
- Policy
manipulation: Far
from the reality, previous analysis about inflation has embraced external
factors (exogenous factors, e.g. weather, international price and exchange
rate) than realizing the internal ones (endogenous factors, e.g. discount
rate and interest rate). “The NRB is an inflation inducer because it plays
five roles: monopoly issuer of currency, banker’s note, regulator of
commercial banks, and lender of last resort and conductor of Monetary
Policy. Where, the Monetary Policy is a process which allows the NRB (as
ordered by the government) to control the supply availability and cost
(interest rate) of the money. It is self evident that hence the cause of
inflation is the policy manipulation by NRB bureaucrats.
Within the field
of Monetary Policy, the potential subversion of the underlying objective of
price stability is understood by the jargon ‘time inconsistency’. There is a
broad consensus that stable money is too important to be left to the day-to-day
political process.
- Alternative
to central banks: Once again, what we need are sound free banking
foundations. We do not have such foundations and are unlikely ever to get
them if things continue as they are. Central banking is a non-market,
centralized approach to monetary matters. A central bank is granted
certain legal powers and privileges that are the means by which it
attempts to manipulate selected macro-economic measures. It is an absence
of any central monetary authority and the issuance of notes as well as
deposit accounts by individual private banks. More generally, under a
free-banking structure, "banks are free to pursue whatever policies
they find advantageous in issuing liabilities and holding asset portfolios,
subject only to the general legal prohibition against fraud or breach of
contract".
Private Banks
issue better currency, but central banks issue currency today not because they
have outcompeted the private banks at attracting loyal customers but because
their sponsoring government outlawed private competition. This is especially
obvious in countries where the public has every reason not to believe the
central bank’s promise to redeem its currency. A central bank is a breach of
freedom and private property, which needs to be abolished.
Impact of
inflation (implications) to business managers
Business
environment is a dynamic phenomenon. It never remains constant. One of the
factors which make it such dynamic is Inflation. Inflation abruptly affects the
business. It may be vice for many people but it can be turned out to be virtue
for business managers if they have got the capability to cope it effectively.
Only a manager with farsightedness can turn this negative situation in their
favor. A business manager must have this capability in order to survive in the
global market. Sometimes, according to the rate of inflation, managers have to
make very complex decisions. Hence, market inflation rate makes the task of
every manager somehow critical and complex.
Following are
some of the implications of Inflation to business managers or business environment.
- Fall in purchasing power of money: High inflation redistributes the income of people. The fixed income
earners and those lacking bargaining power will become relatively worse
off as their purchasing power falls.
- Demand for higher rate of wages: Trade unions may demand for higher wages at times of high
inflation. If the claims are accepted by the employers, it may give rise
to a wage-price spiral which may aggravate the inflation problem.
- Undermine business confidence: During a high inflation period, wide fluctuations in the inflation
rate make it difficult for business organizations to predict the future and accurately calculate
prices and returns from investments. Therefore, it can undermine business
confidence.
- Decrease in export leads to trade deficit: When inflation in a country is more than that in a competitive
country, the exports from former country will be less attractive compared
to the other country. This means there will be fewer sales for that
country’s goods both at home and abroad and that will create a larger
trade deficit. At the same time, high inflation in a country weakens its
competitive position in the international market.
- Product quality issues: The managers have to meet the rapid demand of the market so to
fulfill that they make rapid supply which affects the product quality.
- Change
in production volume pattern: The production volume pattern will
change as demand will be high. A good strategy is needed to meet the needs
of public.
- Higher
rediscount rate of central bank: The rate at which NRB buys or
rediscounts the eligible bill of exchange and the other approved
commercial papers represented by the commercial banks will be high.
- Distort in consumer behavior: High inflation distorts consumer behavior. Because of the fear of
price increases, people tend to purchase their requirements in advance as
much as possible. This can destabilize markets creating unnecessary
shortages.