Market watch Price hike control

KATHMANDU: The recently announced Monetary Policy for the fiscal year 2009-10 has projected the price hike at 7.5 per cent — almost half the present rate.

However, the government has been since last year failing to control price rise. Nepal Rastra Bank (NRB) and the Finance Minister — in the budget — project growth and price hike ritually every year. They failed

last year to contain the price hike and this year too, people are feeling the heat of the price hike.

The people have not got any relief from the price spiral as neither the budget nor Monetary Policy has tried to tackle the key factors that have led to the current surge in inflation.

“It requires better management of financial, monetary and political causes as the price hike is co-related to all of them,” said National Planning Commission (NPC) vice-chairman Dr Yubaraj Khatiwada. The key reason behind the price

hike is insufficient supply, he opined adding that the bandhs/road blockades/ syndicates have contributed 10 per cent to the total

price rise.

The other major reason for price hike is more money chasing less goods. There is a shortage of goods due to hoarding, curtailing and supply constraints. The Commerce Department last week raided some of the godowns in the valley on the charge of hoarding. However, the traders protested and the government seems to have backed down as not a single trader has been booked.

Rise in salary and remittance inflow has also

contributed to the price hike. The remittance inflow has increased by 55.5 per cent and crossed the Rs 169 billion mark. But remittance has been spent on unproductive areas like land

and houses, fuelling


World Bank Economic Advisor for the South Asia Region, Ejaz Ghani said Nepal is benefitting from higher inflows of remittances and healthy availability of foreign aid. “With the decline in global commodity prices, the balance of payments (BoP) and fiscal situation are comfortable and there is no evidence of a liquidity constraint on domestic demand,” he said adding that on the contrary large foreign exchange inflows are creating some demand pressure.

The private sector could not become an engine of growth as the manufacturing industries have not seen

any growth while consumption is increasing. Labour disputes and frequent

power outage has hit

production, leading to more unemployment.

The government also could not spend on development activities that would have generated employment, It instead spent more on unproductive areas. In the first 10 months of 2008-09, recurrent expenditure increased by 26.5 per cent to Rs 81.9 billion. In the corresponding period of the year before that, this expenditure had increased by 21.9 per cent, according to NRB.

It was that upward revision of salaries of government employees as well as an increase in non-budgetary expenditure that led to such acceleration in recurrent expenditure in the review period.

All this led to a price spiral, despite the government’s tall claims of containing the price rise. The year-on-year (y-o-y) consumer price index rose by 12.9 per cent in mid-May compared to that of 9.2 per cent in the same period the last fiscal year, according to NRB.

The food and beverages group pushed the price

hike up as the inflation, in the review period, was driven mainly by the 16.5 per cent price rise in food

and beverages group. The price index of non-food and service group increased by 8.8 per cent.

The price increase in food and beverages group was 13 per cent and that in non-food and services group was 5.3 per cent in the same

period the last fiscal year. The price of items in food and beverages group like sugar and sugar-related products increased by a whopping 66.9 per cent in sharp contrast to last year’s decline of 0.5 per cent, said the central bank.

Similarly, the price indices of vegetables and fruits as well as meat, fish and eggs sub-groups increased by 33.5 per cent and 27.5 per cent respectively in the review period compared to an increase of 1.8 per cent and 10.2 per cent respectively in the same period last year.

The indices of pulses also rose by more than double to 26.3 per cent compared to an increase of 12.1 per cent in the same period last year. The subgroup of grains and cereal products also witnessed a price rise of 6.3 per cent compared to an increase of 21.0 per cent in the corresponding period of the previous year.

In the review period, the y-o-y core inflation rose to 12.7 per cent from 7.5 per cent a year ago.

Recognising the high inflationary pressure, NRB has announced a cautious and tight Monetary Policy

envisioning to containing inflation at 7.5 per cent. However, there has been no change in the political situation and the prevailing political instability will lead to hoarding further fueling price rise, with little or no hope for the public.

Policy measure taken by the Budget

The government is trying to get consensus on banning strikes and bandhs. Declaring the highways a strike-free zone and implementing third-party insurance, the budget has tried to protect highways from unwanted bandhs, accidents and disputes leading to bandhs for compensation.

It has promised to keep the supply route — the highways — free of disturbances. — HNS

Policy measure taken by NRB

The Monetory Policy has reintroduced Statutory Liquidity Ratio (SLR) to contain inflation and fuel growth as it is commonly used to contain inflation and fuel growth by increasing or decreasing it, respectively. This counteracts by decreasing or increasing the money supply in the system. — HNS

Factors leading to the price hike

Contributing factors Price Weightage (%)

Indian market 40

Bandhs/road blockades/syndicates 10

Stockists/wholesellers 20

Hoarders/blackmarketeers 30