Weeks after governor Bijaya Nath Bhattarai’s admission that the Nepal Rastra Bank may be unable to control inflation, and following the huge price hikes in diesel and kerosene this month, NRB has come out with a mid-term review of monetary policy, introducing new ‘monetary instruments’ aimed at reining in inflation and contributing to price stability in the economy. Accordingly, it has revised bank rates upwards by 25 points to 6.25 per cent. This increase, Bhattarai expects, will help slow the inflationary pressure on the economy. As for the ‘supply shock’, meaning oil price hikes, monetary measures can have little impact. NRB also said that the GDP growth rate would go down during the current fiscal year, as major sectors of the economy, such as agriculture and industry, have performed poorly.

The central bank’s monetary measures came amid NRB’s earlier predictions of higher inflation rates this year and experts’ prediction of a gloomy scenario for the economy as well as for the inflation. At least in part, the new battery of tools has been announced to assuage public fears as well as to give the impression that the central bank is doing something to tame the inflationary monster. How far the dependence on a small adjustment of bank rates will help NRB achieve its objective is uncertain. NRB officials also say that since NRB holds treasury bills of more than Rs.12 billion, it is in a position to maintain price stability through open market operations. However, the net negative growth in GDP and the rising level of consumption fuelled by huge remittances from Nepali workers abroad on the one hand and the ballooning unproductive expenses and yawning budgetary deficit on the other make any talk of keeping inflation within reasonable bounds seem unrealistic.

Nepal is indeed facing a situation which economists call stagflation. The conflict and political uncertainty too have contributed to the inflationary spiral. Expectations of shortages and price hikes have added to the inflationary pressure through greater demand and price increases. Moreover, the low interest rates on bank deposits are lagging behind the rate of inflation which means that savings lead to an erosion in the real value of money. Economists say that NRB’s ability to control inflation through monetary measures has been constrained by its commitments to IMF and the fixed exchange rate between Indian and Nepali currencies. Other factors have weakened it further. Without addressing the conflict and national deadlock and its economic impact, NRB’s limits are obvious.