Why NRB's inflation projections always fall flat

Published On: July 12, 2016 02:30 AM NPT By: Sagar Ghimire

KATHMANDU, July 12: One of the primary objectives of Nepal Rastra Bank (NRB), the central bank of the country, is to maintain price stability.

However, NRB has failed to meet this objective since the last nine years as the rate of inflation has always surpassed the level projected by it.

NRB issues its monetary policy every year after the government announces the annual budget, and in that policy the central bank projects the inflation rate and announces the monetary tools for keeping it in check. NRB is scheduled  this week to introduce its monetary policy for fiscal year 2016/17, amidst worries that the government's expansionary and distributive budget is likely to drive up inflation further.

Data on inflation compiled by Republica for the last nine years shows that the central bank's attempt to tame  inflation has always fallen flat.

According to the data, the inflation, as measured by the Consumer Price Index, has invariably exceeded the estimated rate.

Economists say that the central bank has failed to get its projections right because of factors beyond its reach. "The National Planning Commission sets the ceiling for the budget. The government brings a budget that is far higher than the NPC ceiling. Likewise, the central bank estimates the inflation rate. Coordination between these entities is utterly lacking, thus leaving NRB without an accurate plan for injecting additional money into the market," said senior economist Bishwambher Pyakuryal. "There is a huge amount of money sloshing about in the black economy and pushing up the price index, and the central bank does not take this into consideration."

Many claim that high inflation in Nepal is mainly due to disturbances and supply side constraints such as artificial shortages, black marketing and transport syndicates. These push up the cost of goods and services, leaving little elbow room for the central bank to tame inflation.

Ram Prasad Gyawali, head of the Central Department of Economics at Tribhuvan University, claimed that the wide gap in inflation projections by NRB  and real prices will erode the credibility of the central bank. "The first priority of the central bank should always be caping inflation and holding the price line. If the central bank fails to keep  inflation within its own projection, the blame lies squarely on it," he added.

However, NRB officials argue that it's wrong to blame the central bank for high inflation. "NRB only makes projections, unlike central banks in other countries that set targets  and try to rein in inflation accordingly. Even in those countries, the real inflation differs from the targets," said Nara Bahadur Thapa, executive director at NRB Reasearch Department. "Nepal does not have an inflation target regime, so it's not that inflation should be at the level that the central bank projects. But our attempts always remain to keep inflation at the projected level and maintain price stability," he added.

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