Inflation pushing the cost of living northwards

Nepal’s economy is grappling with the bitter reality of a recession, even if it hasn’t been officially acknowledged by the government. Despite rosy forecasts from global financial heavyweights like the World Bank, International Monetary Fund and Asian Development Bank, the nation’s economy is reeling under a multitude of challenges.

A relentless surge in inflation is delivering a harsh blow to the commoner. Experts say that Nepal’s economy seems trapped in a downward spiral of high inflation and sluggish growth. Pushpa Kamal Dahal’s government is facing intense pressure from opposition parties and various stakeholders to take immediate action to revive the faltering economy.

A report published by Nepal Rastra Bank reveals that consumer price inflation reached a worrisome 8.19 percent in mid-Sept 2023, up from 7.52 percent in the previous month. According to the World Bank, consumer prices are scaling new heights in the current fiscal year.

The numbers are unsettling. Food and beverage inflation has skyrocketed to 9.74 percent, while non-food and service inflation is at 6.99 percent. Economists are sounding the alarm, warning that inflation is poised to rise in the coming months, further increasing the cost of living.

Economist Dilli Raj Khanal says the rising inflation is a glaring example of failed monetary policy. He warns that inflation is likely to grow after the festivals if the government fails to see the problems through new and innovative ways, adding that fresh crises are on the horizon. 

The price index for spices has surged by an astonishing 45.46 percent, sugar and sugar products by 17.86 percent, and vegetables by 14.51 percent. Cereal grains and their products are up by 13.38 percent, milk products and eggs by 12.60 percent, and restaurant and hotel prices have climbed by 10.97 percent. The brunt of this rising inflation is felt most acutely by the people. 

In its recent report, the World Bank underscores the challenges of taming high inflation and the need for a careful balancing of policies to stimulate growth.

The decline in edible oil prices from Feb 2023 onwards, reflecting global price reductions, had an offsetting effect on prices. But the persistence of high inflation impedes policies to stimulate growth. Nepal’s vulnerability to external shocks implies a difficult trade-off between policies that boost growth and those that contain inflation.

The World Bank report also identifies key drivers of food price hikes, including supply side shocks such as India’s export restrictions on wheat and rice, along with domestic policy changes like the removal of VAT exemptions on basic food items. The report further highlights the importance of price support to producers of rice, milk and wheat.

To compound matters, factors like the lumpy skin disease and unpredictable monsoons are impacting agricultural output, while services and industry are being affected by higher-than-expected import prices and export bans from India.

In this tumultuous economic landscape, Nepal’s private sector has voiced its concern, claiming that international financial institutions are exerting undue pressure on Nepal Rastra Bank and the Ministry of Finance. Despite the various challenges the nation faces, Nepal’s external position has strengthened, thanks to prudent fiscal and monetary policies, thriving remittances, and a boost in tourism.

However, the number of Nepali workers taking approval for foreign employment decreased 28.3 percent to 74,466 in September.   

The Nepali remittance sector, according to the NRB report, saw a remarkable 22.1 percent increase to Rs 228.37bn compared to an increase of 19.8 percent in the same period of the previous year. However, the number of Nepali workers seeking approval for foreign employment has seen a significant 28.3 percent decline to 74,466 in September. The economic landscape is complex, with some positive signs like a 3.8 percent increase in gross foreign exchange reserves to Rs 1,598.9bn in mid-September compared to Rs 1,539.36bn in mid-July 2023.

While Finance Minister Prakash Sharan Mahat acknowledges some gradual improvements in the nation’s economic situation, it's evident that not all internal indicators suggest a smooth ride.

Reflecting the current state of affairs, the government’s total expenditure reached Rs 131.14bn in the first two months of the fiscal year 2023/24. Recurrent expenditure, capital expenditure and financial expenditure stood at Rs 87.66bn, Rs 8.16bn, and Rs 35.31bn, respectively, during the review period. Up till mid-Sept, the government’s total revenue collection, including funds transferred to provincial and local governments, reached Rs 141.08bn, with tax revenue accounting for Rs 127.96bn and non-tax revenue at Rs 13.12bn.

The total expenditure stood at Rs. 4.77bn and resource mobilization of provincial governments stood at Rs 21.16bn, respectively. The total resource mobilization of provincial governments include the grants and revenue transferred from government totaling Rs 15.15bn, and revenue and other receipts of provincial governments totaling Rs 6.01bn.

The provincial governments have also been active on the financial front, with total resource mobilization reaching Rs. 21.16bn. This figure includes grants and revenue transferred from the central government, amounting to Rs 15.15bn, as well as provincial governments’ own revenue and receipts, totaling Rs 6.01bn.

Economy at a glance

• Inflation at 8.19 percent
• Exports decrease by 7.8 percent
• Trade deficit decreases by 4.7 percent
• Remittances increase by 22.1 percent
• Balance of payment remains at a surplus of Rs 53.61bn
• Forex stood at Rs 159.90bn
• Government expenditure amounts to Rs 131.14bn
• Revenue collection Rs 141.08bn