The economy was targeted to grow by 5.5 percent in last year’s budget, but by all indications, it was growing just by 3.6 percent. In general, when the economy is not growing, prices do not rise. But as of February 2012, the inflation rate was about 7 percent in Nepal, while the rate increased to 10.2 percent by February 2013. This indicates that Nepal is facing an inflation problem despite the global economic recession.
To cope with the inflation, the Finance Minister announced an increase in the pay scale of all government employees, including the defense and police forces, by 18 percent in this year’s budget. This was in addition to some increases in other benefits as well. At the same time, the Finance Minister has also realized the importance of limiting inflation in the coming year. This is already a contradictory proposition.[break]
telegraph.co.uk
Considering the below-par performance of the economy in the previous year, the question is: is it possible to limit inflation now? This year’s budget starts with, among others, macroeconomic stability as a major objective.
The budget recognizes that the cause of the inflation is adverse supply system and low economic growth. The budget also recognizes that there is no alternative to increasing export by producing goods and services of comparative advantages. This is theoretically correct, but can we expect a significant increase in production this year, particularly exportable goods production, enough to counter the inflation? All past performances and economic trends indicate otherwise. If this year comes out different, that would be welcome.
The increasing value of dollar would have been a cause for celebration if the production of our exportable goods was high. Our goods would have been very cheap in international market. But in reality, we have a gaping trade deficit with our meager exports and ever increasing imports. Devaluated Nepali currency with respect to US dollar has widened the trade deficit. Nepalis are becoming poorer.
As of February 2013, per capita income was US $717. By June 2013, it fell down to US $658 due to the drop in the value of Nepali currency with respect to US dollar. This squeezes our savings and makes it difficult to spare any for investment. This may also drag down our economic growth.
All economists agree that the peoples’ expectation is one of the strongest factors to influence market price. Expectation has already begun impacting the Nepali economy. Even though the salaried personnel have not received increased salary yet, market prices for many commodities have already started rising after the budget announcement of pay raise.
By the end of the year, the prices may well rise very high. Black markets and long lines are the natural results of price control.
It is a pity that some advocates try to pressurize the government to fix prices when they start rising. But this would be no more than a political stunt. It does not help control prices.
Even though the Nepali market is controlled more by suppliers than by consumers, artificial mechanisms of controlling market prices do not provide solutions. Actually, it only aggravates the situation. Instead, a better solution would be to improve the supply situation of the commodity concerned or to discover some alternatives that encourage reducing demand of the particular commodity. Neither of them is the focus of the price control mechanism in Nepal (or in any other country for that matter).
The budget also recognizes the importance of production in controlling inflation. The estimated budget deficit is about 3.4 percent of the total budget: Rs 14.5 billion out of the total budget of Rs 424 billion. This is not a very large amount.
But the reality is that the economy is not growing as expected, which means that the tax revenue would not grow either. This forces the budget deficit to increase further. To fulfill the expenditure obligation, the government may either borrow or print more money. Printing money is nothing more than taxing the people through inflation. The deficit adds up to the inflation.
With no increase in production, inflation will spiral up and become more and more difficult to control.
Nepal’s major export is tourism. When the value of dollar increases, we can expect to attract more tourists. This is a kind of export. But even if export increases, imports will hardly decrease. Rather, the budget will encourage more imports, which means that it may not help reduce the trade deficit. It will not be enough to reduce the inflationary pressure on the economy.
Will the current budget contribute to limiting inflation? It is doubtful. In fact, not just doubtful, it is almost impossible. As long as production does not increase and import does not go down, there is no way inflation can be controlled.
The author is Professor
of Economics &
Business at University of Rio Grande, Ohio
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