The continuing inflation NRB has to act

Inflation is common word. The general people dislike the word, as it makes

their life difficult. Politicians do not want to see the inflation growing as it will

have negative impact on their political career, in many countries. Economists are still arguing and discussing to chalk exact model to explain inflation. It is said to be occurred when there is persistent rise in price of goods and services.

Temporary rise in price

is not considered as inflation, nor price change

of one or two items are representative for inflation. Most of the economists agree that inflation is a money matter. It is said to occur with “too much money chasing too few things”.

Many tools have been

developed to measure the rise in price. Consumer Price Index (CPI) is the most interesting for the common man, as it reflects the changes in price level of the goods and services of their requirement. The index is prepared using the basket of goods comprising of food

as well as non food items in urban centers. Different weights are assigned to selected items based on consumption pattern of normal urban consumer. Such consumption pattern is derived by doing consumer survey by the central bank.

The current inflation

in Nepal is running in double digit figure and is considered alarming. The

available data show about 13% increment in price this year as measured by CPI. There is more increment

in the price of food and

beverages items than non food items. About 16.5 percent increment is recorded for the food items.

Sugar and sugar related items showed 66.9 percent price hike, whereas vegetables and fruits recorded as high as 33.5 percent rise in price followed by meat,

fish and eggs showing 27.5 percent increment. Price of non food items and service groups show an increment of 8.8 percent as compared to last year price.

It should be noted that these baskets of goods and services do not cover

all the items. But it is generally observed that result of such rise in price of

all these recorded items, other non recorded items are also show increment in the price, thus further adding hardship to the life of normal citizen.

Nepal Rastra Bank(NRB) is responsible to keep the price rise at reasonable level so that economic development can be achieved without bearing the burden

of inflation. Such responsibility is legally established as per The Nepal Rastra Bank Act 2002.

The central bank should be able to identify factors

affecting inflation and should be able to take necessary steps to keep the inflation rate under control. In this regard, the central bank has identified Indian inflation as major factor for price rise in Nepal.

The studies carried out by the Research division of the bank in 2007 expressed that in the long term, the price level in Nepal is determined by that of India and its finding is supported by IMF working paper, 2007. Such findings made the life of the central bank easy. As put by one of our economists, it developed the tendency of building “Your choice is my choice”. As Nepalese economy is small and open, there is the practice to follow the foot step of large neighboring country India about our monetary policy.

This factor is so influential that the research documents of Nepal Rastra Bank suggested that there should be a mechanism to continuously monitor price developments in India, so that suitable policies can be adopted in Nepal for addressing inflation problem. But there are reasons for such arguments.

Analysis of historical trends of price rise indicated that inflation in both

the countries was found to be moving in tandem. Hence our central bank

took either inactive or reactive approach to the inflation problem. If the inflation is at lower level, there was no activity required from our institutions. If it was found rising, reactive tools were developed for contraction of money. A genuine proactive approach was missing from the responsible central monetary authority of Nepal.

The life was easy till this year for the monetary authority as they used to have evidence to show the close movement of price in India and Nepal and “no remedy” approach was there.

But current price movement in India and Nepal

is found to be diverging. India recorded negative growth in inflation during May, 2009, whereas Nepal recorded the highest inflation rate in seventeen years during this period.

Whatever approach is taken to identify the causes of inflation in Nepal,

some critical factors look apparent. The first and foremost thing is that current rate of price rise is not

contended yet and if it continues at the current rate, there would be further hardship for the people.

The budget for fiscal year 2066/67 inherits inflationary character with enlarged size of budget of Rs. 285 billion with budget deficit of Rs 30 billion.

Both these facts of large budget and large deficit will simultaneously create conditions for price rise though the budget claims to hold inflation at 7% for this new fiscal

year. Moreover, the distributive budgetary approach will also further aggravate the price situation.