Central bank warns of stagflation as inflation stands at three-year high

Kathmandu, December 16

Nepal Rastra Bank, the central bank, has warned of stagflation, as consumer prices shot up by more than 10 per cent in November, while economic growth is expected to drop to lowest in around one-and-a-half decades.

Nepal had contained inflation within single digit in the last 23 months. But in November, it stood at 10.4 per cent the highest in the last three years, reveals the latest Macroeconomic Report of NRB.

“The underlying factors for surge in overall inflation have invariably been prolonged strikes in the Tarai, the blockade of trade routes in the country’s southern part and ensuing hoarding of essential items,” states the report.

Consumer prices in the country rise primarily due to two reasons. One is supply-side constraints, such as transport bottlenecks, lack of raw materials, which leads to higher imports of finished goods, inadequate supply of electricity and key inputs to ramp up production, and forms of protests.

The other is price hike passed through imports from India, which is also known as ‘derived inflation’. This means rise in Indian consumer prices, automatically leads to price hike in Nepal, as over 60 per cent of the country’s imports come from India.

In November, inflation rate grew at a faster pace in India and stood at 5.4 per cent, as against five per cent in October. This helped build inflationary pressure in Nepal in November.

But what is striking lately is widening inflation wedge between Nepal and India. In November, for instance, consumer inflation stood at 10.4 per cent in Nepal and 5.4 per cent in India, reflecting inflation wedge of five per cent.

Inflation wedge in the same month last year stood at only 2.8 per cent.

“The rise in inflation wedge between Nepal and India was on account of lingering impact of earthquakes of April and May, strikes in the Tarai and the recent blockade,” states the NRB report, adding, “If the prevailing atmosphere (prolongs), rise in prices of essential items is likely to get entrenched, leading to a situation of cost-push inflation and stagflation.”

Nepal has never faced stagflation in the recent past. And utterance of the word does not bode well for the economy because it is a lethal combination of stagnating economic growth, high unemployment rate and rising consumer prices.

But considering the latest macroeconomic figures, possibility of Nepal meeting such a fate cannot be ruled out.

The government has already said economic growth would stand at two per cent this year, the lowest since 2001-02. Yet many consider this estimate ‘optimistic’.

A pessimistic forecast made by NRB on November 20, on the other hand, shows economy contracting by 1.1 per cent (at basic price) this fiscal year.

If this prediction comes true, Nepal will record negative economic growth for the first time since 1982-83.

Another cause of concern is growing unemployment rate triggered by shortage of petroleum products and other materials. It is said over one million workers in the construction sector alone are currently out of jobs because of halt in construction of physical infrastructure.

Then there is growing inflation rate, which may continue to rise in the coming months if the current situation persists.

These macroeconomic indicators make a perfect recipe for stagflation.

And if Nepal faces this situation it would be a tough nut to crack because policies framed to tame inflation could be counter-productive for economic growth and attempts to ramp up growth may, in turn, build inflationary pressure.