KATHMANDU, Dec 16: Nepal Rastra Bank (NRB) has warned that the country may face stagflation if the current tarai turmoil and undeclared economic blockade continue much longer. The central bank's grave warning comes at a time when inflation is climbing at an alarming rate amidst the ongoing tarai unrest and the concurrent undeclared blockade imposed by India.
Stagflation refers to a situation of contraction of economic growth coupled with rise in inflation and unemployment.
Releasing a report today on the 'Current Macroeconomic and Financial Situation' in the country, the central bank said that consumer price inflation shot up to 10.4 percent in the fourth month (Kartik) of the current fiscal year, 2015/16, compared to the government's target of containing the annual average inflation at 8.5 percent this year.
The consumer price index, which measures the variation in prices paid by typical consumers for retail goods and other items, was 7.5 percent in the corresponding period last fiscal year.
Economists also paint a bleak picture for the country. “All the economic activities have come to a grinding halt. Prices are galloping, the country's international trade has come down more than 30 percent and the unemployment rate is going up. This state of stagflation is very unfortunate for us,” said Tilak Rawal, former governor of NRB.
The central bank has blamed the protracted strike and tensions in the tarai, the unofficial economic blockade on trade in the southern part of the country and the ensuing trend of hoarding up on essential items, as the major underlying reasons for the rise in inflation.
“Most projects of the government and the private sector are stalled and industries are either closed or not running at full capacity, as they do not have raw materials due to the current turmoil. Transportation, services, tourism and other sectors face a similar situation. The output of the country has fallen significantly,” said Nar Bahadur Thapa, executive director at Research Department at NRB. “However, prices are in ascending mode since the last few months. We are facing stagflation,” he added.
According to the Federation of Nepalese Chambers of Commerce and Industry, 90 percent of industries and businesses in the southern plains have closed, wiping out some 220,000 jobs all told. The government, while issuing its white paper recently, had already revised the economic growth projection downward to 2 percent for 2015/16 from the initial target of 6 percent stated in the budget speech.
“If the prevailing atmosphere prolongs, the rise in the prices of essential items is likely to get entrenched, leading to a situation of cost-push inflation and stagflation,” reads the NRB report.
The report also states that the central bank is struggling to tame inflation through its monetary instruments.
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“Though the central bank has been using its liquidity management instruments with utmost priority, it appears difficult to control inflation through such instruments until the supply situation becomes normal,” it further said.
Former NRB governor Rawal also does not see anything that NRB can do now to control prices. “They are not in a position to control inflation,” said Dr Rawal. “The central bank can tame inflation if it is demand-driven. However, the current price rises are supply-driven,” he added.
