The US Federal Reserve is currently under scrutiny. Reason: inflation is running below targeted two per cent rate.
Although many US central bank officials seem confident about meeting
the annual target, many pundits are warning inability to do so may
induce deflationary pressure. This implies prices may fall because of
low demand and affect the economy, which largely depends on consumption.
Nepal, of course, cannot draw a parallel to what is going on in the world’s largest economy and there are no indications of consumer prices here falling down. But this case provides a snapshot into the difficult task of predicting inflation.
Like the US Federal Reserve, the responsibility of setting country’s annual inflation estimates lies with Nepal Rastra Bank (NRB).
Launching the Monetary Policy 2013-14 on Sunday, it said annual average inflation would stand at eight per cent this fiscal year. This roughly means consumers spending Rs 100 to purchase a good now will have to fork out Rs 108 while buying the same thing at the end of the fiscal year.
But the question raised by many is if the target is achievable?
Many say ‘no’ as the central bank has miserably failed in predicting inflation in the last five years.
In the beginning of last fiscal, for instance, NRB said annual inflation would stand at 7.5 per cent. Then after six months into the fiscal year it revised its estimates to 9.5 per cent. Although final figure is yet to come out, it is said average annual inflation would hover at 9.9 per cent.
Revising inflation estimates, as in the last fiscal, has become a custom for NRB. And the difference between prediction made at beginning of the year and the revised estimate announced after six months into the fiscal year is usually wide, with highest in the last five years being 3.7 percentage points in fiscal 2009/10.
That’s why economists like Dr Bishwambar Pyakurel are not hopeful about NRB meeting its target this year as well.
“I don’t think NRB will achieve its inflation target this year because Nepali currency’s depreciation is likely to make imports expensive,” Dr Pyakurel told The Himalayan Times.
Nepali currency has now dipped to Rs 94.90 per US dollar as against Rs 89.91 a year ago. Since most of the goods available here are imported—including those meant for consumption and those used as raw materials for production of goods — a weaker currency means Nepali traders will have to give more of domestic currency while purchasing goods priced in US dollar, thereby pushing up prices. Yet this problem is just the tip of the iceberg.
Another hurdle that is likely to prevent the central bank from meeting its inflation target is presence of intermediaries in the market.
“Food commodities like rice and pulses generally pass through four to five traders before reaching the shelves of consumers. And at each layer profit taking occurs, which pushes up prices,” said Raj Kumar Shrestha, general secretary of the Nepal Retailers Association (NRA).
This is the same in case of vegetables, where brokers, last year, were found responsible for pushing up prices by as much as 200 per cent.
This is why NRB usually cites reasons such as food and petroleum price hikes for not being able to meet its annual inflation target. But this fiscal year there is more to these supply side constraints.
One, salaries of over 500,000 civil servants have gone up. Two, election date has been announced. “Hike in salaries and events like election increase money supply, which raises demand and pushes up prices of goods,” Dr Pyakurel said.
Add to these the loose money policy adopted this fiscal by the Nepal Rastra Bank to boost lending and recipe for disaster is prepared.
The central bank has itself acknowledged that if the extra bank credit is used for consumption, instead of investment in productive sector, inflationary pressure would mount. “And all this will affect mid- and low-income groups the most, as they are the ones who struggle to make ends meet,” Dr Pyakurel said.
src : THT
Nepal, of course, cannot draw a parallel to what is going on in the world’s largest economy and there are no indications of consumer prices here falling down. But this case provides a snapshot into the difficult task of predicting inflation.
Like the US Federal Reserve, the responsibility of setting country’s annual inflation estimates lies with Nepal Rastra Bank (NRB).
Launching the Monetary Policy 2013-14 on Sunday, it said annual average inflation would stand at eight per cent this fiscal year. This roughly means consumers spending Rs 100 to purchase a good now will have to fork out Rs 108 while buying the same thing at the end of the fiscal year.
But the question raised by many is if the target is achievable?
Many say ‘no’ as the central bank has miserably failed in predicting inflation in the last five years.
In the beginning of last fiscal, for instance, NRB said annual inflation would stand at 7.5 per cent. Then after six months into the fiscal year it revised its estimates to 9.5 per cent. Although final figure is yet to come out, it is said average annual inflation would hover at 9.9 per cent.
Revising inflation estimates, as in the last fiscal, has become a custom for NRB. And the difference between prediction made at beginning of the year and the revised estimate announced after six months into the fiscal year is usually wide, with highest in the last five years being 3.7 percentage points in fiscal 2009/10.
That’s why economists like Dr Bishwambar Pyakurel are not hopeful about NRB meeting its target this year as well.
“I don’t think NRB will achieve its inflation target this year because Nepali currency’s depreciation is likely to make imports expensive,” Dr Pyakurel told The Himalayan Times.
Nepali currency has now dipped to Rs 94.90 per US dollar as against Rs 89.91 a year ago. Since most of the goods available here are imported—including those meant for consumption and those used as raw materials for production of goods — a weaker currency means Nepali traders will have to give more of domestic currency while purchasing goods priced in US dollar, thereby pushing up prices. Yet this problem is just the tip of the iceberg.
Another hurdle that is likely to prevent the central bank from meeting its inflation target is presence of intermediaries in the market.
“Food commodities like rice and pulses generally pass through four to five traders before reaching the shelves of consumers. And at each layer profit taking occurs, which pushes up prices,” said Raj Kumar Shrestha, general secretary of the Nepal Retailers Association (NRA).
This is the same in case of vegetables, where brokers, last year, were found responsible for pushing up prices by as much as 200 per cent.
This is why NRB usually cites reasons such as food and petroleum price hikes for not being able to meet its annual inflation target. But this fiscal year there is more to these supply side constraints.
One, salaries of over 500,000 civil servants have gone up. Two, election date has been announced. “Hike in salaries and events like election increase money supply, which raises demand and pushes up prices of goods,” Dr Pyakurel said.
Add to these the loose money policy adopted this fiscal by the Nepal Rastra Bank to boost lending and recipe for disaster is prepared.
The central bank has itself acknowledged that if the extra bank credit is used for consumption, instead of investment in productive sector, inflationary pressure would mount. “And all this will affect mid- and low-income groups the most, as they are the ones who struggle to make ends meet,” Dr Pyakurel said.
src : THT
