Unveiling the Monetary Policy for the fiscal year 2015/16 on Thursday, the NRB-central regulatory bank-vowed to keep the annual average inflation at 8.5 percent."The inflation target seems good. But from the pragmatic perspective, it would be hard to keep inflation below 8.5 percent," senior economist Madan Kumar Dahal told Republica. "The government has not been able to ease the supply side constraints," he said. "Likewise, there will be inflationary pressure from the demand side since there will be a large flow of funds for reconstruction and rehabilitation projects in the aftermath of the earthquake."
Money that goes into the hands of public leads to the rise in demand for food or service sector, which leads to price hike. The phenomenon is called demand-pull inflation, Dahal explained.
Former NRB Governor Deependra Bahadur Kshetry echoed Dahal. "All the previous inflation targets were not achieved and similar would be the case in this year. The target of Nepal Rastra Bank to tame inflation is not achievable since overall production is sure to decline as people's economic activities are still affected," added Kshetry.
While the NRB has given due importance to six percent economic growth target as stipulated in the fiscal policy, the central bank, however, seemed to undermine the gigantic challenge of taming inflation. Departing from earlier trends, the budget announced by Finance Minister Ram Sharan Mahat last week also skipped the inflation issue.
Though NRB rarely meets its annual average inflation target it sets in the monetary policy, inflation is estimated to stand at 7.5 percent in the last fiscal year 2014/15 against the earlier target of 8 percent. Though the central bank said it will use short-term monetary instrument to crack whip on inflation, it will find this difficult if reconstruction work speeds up in line with the fiscal policy. However, government inefficiency in development spending could help central bank contain inflation as low spending would not fuel price hike.
"After hovering around double digits for past many years, inflation has remained moderate. The government has pursued a fiscal stimulus policy. It is massively injecting liquidity for reconstruction. All this means that inflation may slightly go up, but it would not be much higher than the target set by the current monetary policy," said former NRB governor Tilak Rawal.
Earlier on June 25, donor countries and organizations pledged Rs 440 billion for reconstruction. Part of the fund committed in the conference is likely to trickle into the government treasury or the banking system in the coming fiscal year. Likewise, the supply side factor also plays a vital role in inflation.
The recent economic survey also pointed out increase in the price of foodstuffs due to drop in agro production and rise in the price of noon-food items and service sector due to disturbance in the supply system, among others, as factors that will push inflation in the coming days.
If there is supply constraint in food and service sector, prices will go up. The government has made a downward revision of agro production growth to 1.9 percent from 2.9 percent, citing unfavorable monsoon. This is likely to drive up food price. "It will be challenging to contain inflation within an appropriate level," reads the Economic Survey. "Thus it is imperative that we coordinate between fiscal and monetary policy to manage the demand side by strengthening the supply side and remove structural barriers for maintaining price stability," reads the survey.
Related story
Revised interest rate corridor system introduced
-1200x560-1779899638.webp)
-1779842101.webp)
