Establishing linkages : Fuel price and quality of life

High food and fuel prices have affected millions of poor people across the world. The World Food Programme terms it a global emergency. Nepal is experiencing a sustained rise in the general price level, which has badly distorted the investment and consumption decisions. There is a fall in living standard as incomes have not been keeping up with the rise in prices. The poor are forced to buy less food or food that is less nutritious. When there is rising income, even the surge in the price of gasoline will not have significant impact on most consumers since the raise helps offset higher price. However, in Nepal, given the share of fuel items in the consumer baskets for overall inflation, a change in oil prices has a serious impact on price indices. If oil prices are adjusted with the demand and supply forces, the rise in the commodity price will be inevitable. Currently we have suppressed inflation.

Nepal is badly affected by high prices because she imports unreasonably large quantities of food. In developed countries, majority of people spend hardly 10-20% of their income on food and therefore can afford to spend more. But in Nepal, as people spend almost two-thirds or sometimes even 80% of their income on food, they cannot spend more. Inflation has raised the cost of production, reduced profit and discouraged investments. As majority of the people believe that in future, their savings will buy less, they are discouraged from saving.

There is an ongoing debate about the far-reaching implications of pricing oil in single currency. For instance, under single-currency regime, if the oil-producing country is paid in euros, it does not mean that their oil is priced in euros. Therefore, the impact of single-currency pricing on the oil market would be the same. Secondly, while the revenue of the exporting countries is received in dollars, they use different currencies for imports from different countries. The change in the exchange rate in dollars, therefore, affects the purchasing power of these countries, and their real income.

In the short term, depreciation of dollar does not affect supply and demand but affects speculation and investment. However, in the long run, depreciation of dollar affects supply by reducing production and also demand by increasing consumption. The reason for assessing such fluctuations under one-currency system is the fact that a decrease in supply and an increase in demand is nothing but higher prices.

There have been some interesting estimates with regard to rising cost of oil, the declining dollar and increasing demand for biofuels. The new report on global food crisis as reported in the Washington Post of May 30, 2008, states that the recent steep jump in global food prices should ease in the near term, but prices over the next decade are likely to remain high. Based on the commodity we select, the average commodity prices is expected to climb by about 10-50% in real terms over the next decade as compared to the average of previous decade. Besides the change in food consumption pattern by switching toward meat and dairy products from traditional staples, especially by more affluent groups of people, the factors responsible for the spike in food prices are weather conditions, population growth, weak public distribution system in developing countries and increasing demand for biofuels. An OECD agriculture official says, about 33% of the expected rise in food prices over the next decade can be tied to biofuels.

Not much work has been done with regard to the impact on agricultural productivity from climate change. Countries like Nepal should allocate significant percentage of their agriculture budget to research and development. International assistance may be sought for technology transfers. Studies have shown the less developed countries can resort to the use of genetically modified seeds for increasing output and lowering prices.

The realisation of escalating inequality and the severity of malnutrition and food insecurity was one of the driving forces for Maoists’ decade-long people’s war. Rising food prices erode government’s capacity to meet basic needs, which becomes a strong source of political tension and violence. High food prices have already led to riots in many countries in Asia and Africa. Therefore, an early resolution of unresolved issues is more important to the Maoists in order to reiterate their earlier commitment on food security.

To conclude, as many think commodity market is a free market, where prices are determined by free forces of supply and demand, nothing much can be done by a single country or even global institution. Reducing demand may be possible in the emerging economy but it is extremely difficult since many countries are not going to compromise on the policy of obstructing growth process. Therefore, “high prices are here to stay. It is time to start learning how to live leaner.”

Dr Pyakuryal is professor of Economics, TU