Much talk but little action to tame rising inflation which is biting Nepalis hard

KATHMANDU: MAY. 23 – Economists have been crying hoarse about rising inflation and the risk to the Nepali economy, but policymakers don’t seem to be much concerned by their warnings and have been acting like it’s business as usual.

It’s apparently not business as usual at Unilever Nepal. The multinational giant says in its latest report that its net profit for the third quarter shrank 32 percent to Rs 220 million simply because people are not buying.

Nepali consumers are not buying domestic goods, but they have been splurging on foreign products. The country’s import bill has been projected to jump to nearly Rs 2 trillion this fiscal year, ending mid-July, which is definitely a bad sign for the economy and portends a full-blown financial crisis, analysts say.

The Central Bureau of Statistics has played down their claims, saying that they expect the import bill to reach the Rs 2 trillion mark, equivalent to nearly half of the country’s GDP, by the end of the fiscal year; and “that’s a good thing as it will boost the growth rate.”

But the majority of goods that Nepal is importing are non-essential and have little to no effect on the growth of the economy. Imports certainly contribute to economic growth, but some of the imports are less important for the economy, insiders say.

“For example, Nepal is spending nearly Rs 100 billion to import agricultural goods, mainly cereal crops. Instead of producing cereals in the country, we are importing them, and this signals which way our economy is heading,” said an unnamed senior statistician at the Agriculture Ministry.

Nepal’s policymakers and planners are finally speaking about inflation.

“As of today, the economy is not in sound health,” declared the central bank governor, Maha Prasad Adhikari, addressing an interaction on the impact of inflation on Nepal’s economy organised by the Federation of Nepalese Chambers of Commerce and Industry.

“It’s a serious issue when the country’s foreign exchange reserves decline by $2-3 billion within a year. We cannot face this situation always. It’s time to save the economy and everyone should work together,” said Adhikari.

Imports have not just increased—they have ballooned. Nepal is now spending on imports in six months what it used to spend in a year before the pandemic. This is not because the quantity of imports has grown, but because their value has swelled three to four times, importers say.

Prices have been driven up by bottlenecked supply chains and robust consumer demand immediately after the COVID cases started to recede.

“In Nepal, consumption increased dramatically,” said Adhikari.

This depleted foreign currency reserves as money flowed out to pay for foreign goods.

Prices have shot up globally.

According to Adhikari, average inflation in Turkey jumped 70 percent. In the United States, consumer price growth surpassed 8 percent in March, its fastest pace since 1981 following a surge in the cost of energy and food. In Europe, inflation rose to a 25-year high of 5 percent.

Nepal’s consumer price inflation rose to 7.28 percent year-on-year in mid-April from 7.14 percent in the previous month and 3.10 percent last year.

“Inflation has been worrying not only poor countries but rich nations too,” said Adhikari.

But economists have not been able to reach a consensus on just how concerned people should be about inflation, and how likely it is to show up on a sustained basis.

“The economy has started to revive a little, but inflation is spiralling out of control,” economist Dadhi Adhikari told the Post in a recent interview. “That’s worrying. Policymakers are not worried because inflation does not touch the lives of the people who frame the policy. It’s only the poor people who suffer.”

Economists have warned that a combination of government stimulus and a sudden rebound in the economy will cause prices to overheat.

The central bank has already mobilised Rs 700 billion in the market.

Rabin Puri, president of the Nepal Feed Industries Association, says prices of raw materials needed to make livestock feed have risen by more than 20 percent. “That obviously will push up the price of chicken in the coming weeks and months,” he said.

As Nepal is an import-dependent country, inflation is likely to rise. Commodity prices are expected to remain well above the most recent five-year average.

In the event of a prolonged war or additional sanctions on Russia, prices could be even higher and more volatile than currently projected, according to the Commodity Market Outlook report of the World Bank Group published in April.

The most significant risk is for people who are scarred by a long period of unemployment. People being out of work, and not able to find jobs, can have a permanent effect on their lives, say economists.

Governor Adhikari said that the liquidity crisis the banks are facing may continue in the long run by analysing indicators like a balance of payments and trade deficit.

Inflation, to which policymakers paid little attention, had already reached a high level before the Russia-Ukraine war began in late February.

“The inflation rate rose because of supply constraints and the prices of coal, natural gas, edible oil and wheat shot through the roof,” said Paras Kharel, research director at the South Asia Watch on Trade, Economy and Trade, an economic think tank operating in five South Asian countries.

To cope with the current price shocks, Kharel suggested targeted social protection schemes like cash transfers for the poor, the establishment of fair price shops, and a reduction of import duties on essential foods temporarily.

Shekhar Golchha, president of the Federation of Nepalese Chambers of Commerce and Industry, called on the government to concentrate on taming rising inflation.

“The high taxes on petroleum products need to be revised as fuel is a key component that impacts the overall consumer prices,” said Golchha. “As the Nepali rupee is falling against the United States dollar, it is expected to increase the trade deficit in terms of value.”

Industry Minister Dilendra Prasad Badu thinks promoting increased use of electricity can bring down oil imports.

“If the regular supply of electricity for households is assured, it will lessen the dependency on fossil fuel,” he said. “But electricity should be made cheaper to increase consumption.”

-Kathmandu Post