Rising US dollar, COVID-19 imapct on supply could push inflation further
March 9, 2020 07:47 AM NPT
KATHMANDU, March 9: The announcement by the government to check inflation rate at six percent is likely to prove hollow as the Nepali currency has been on a free fall against the US dollar for the past few days.
Gunakar Bhatta, spokesperson for the Nepal Rastra Bank (NRB), said the country is likely to face the inflationary pressure this year due to multiple reasons.
“A plunge in the value of Nepali currency against the US dollar and supply bottlenecks caused by the coronavirus outbreak are among the main reasons behind the rising prices,” said Bhatta.
NRB has fixed the exchange rate of Nepali currency against the US dollar for Monday at Rs 118.28 per dollar. With the successive decline in its value, the Nepali rupee has reached close to a record low of Rs 119.33 per dollar witnessed on October 10, 2018.
Bhatta said the US dollar has been rising after the investors moved to gold and dollar as safe havens compared to stocks and businesses following the COVID-19 outbreak. According to him, a number of international organizations including the Organization for Economic Cooperation and Development (OECD) have forecast a massive fall in the growth rates globally. “Investors have been considering also the successive cuts in interest rates by the US Federal Reserve and declining price of crude oil in the international market as indicators of the slump in business confidence,” said Bhatta.
The price of crude oil has already dropped by a third since January to near $45 a barrel. Recently, Saudi Arabia announced to launch an aggressive oil price war targeting its biggest rivals after Russia refused to join production cuts with OPEC and instead increased production significantly. This is expected to take the oil prices further down.
Despite the government’s target to check the consumer price index at maximum six percent, the average inflation as of mid-January, according to an NRB report, stood at 6.41 per cent. Soaring prices of food and vegetables have driven up inflation in the review period, according to the report.
“In the first half of the current fiscal year, the inflation was up due to the food prices on the back of higher vegetable prices, while recently the prices of non-food items also started taking their toll on the economy due to the coronavirus outbreak,” said Bhatta.
At a time when the price index has already crossed the target set by the government, the situation seems to have become even worse due to the adverse impact of the coronavirus outbreak on the supply chain. Since almost last one month following the outbreak of the disease, the import from China, one of the major import destinations of Nepal, has been disrupted.
Now, the depreciation of Nepali currency against the greenback can push the already escalating market prices further, say analysts. “It could further raise the market price significantly as the country is dependent on imports,” Bhatta said.
Nepali manufacturers import most of the raw materials and capital goods from various countries including India, for which the country pays in US dollars. In this context, the costs of infrastructure projects will rise further.
Nepal has pegged the exchange rate system with India, which means that the price of the Nepali rupee against the US dollar is fixed on the basis of the value of the Indian currency. According to the Indian media, the Indian rupee on Friday fell to as low as IRs 74.08 per dollar.