Nepal’s central bank warns of stagflation

Kathmandu, Dec 17 (IANS) Nepal’s central bank has warned that the Himalayan nation will face stagflation if the ongoing four-month-old anti-Constitution agitation in the country’s southern Terai region continues unresolved, as inflation has already jumped to double-digits.

The Nepal Rastra Bank (NRB), in its latest macro-economic report released here on Wednesday, categorically said that prolonged strikes in the Terai region, obstructions on trade routes and hoarding of essential items were key factors contributing to the surge in inflation.

Nepal’s economy was badly hit after the April 25 earthquake. Prolonged political unrest in the southern plains by Madhesi political parties and indigenous groups for the last four months has now taken a severe toll on the country’s fragile economy.

With prices of daily essentials soaring, especially in the last two months, inflation soared to 10.4 percent in the fourth month of the current fiscal, NRB pointed out in the report.

The last time inflation had crossed double-digits was in November 2013.

The central bank warned that if the current political deadlock continues, the price rise of essential items will lead to a situation of cost-push inflation and stagflation, which will be difficult to control through fiscal management.

Stagflation is a situation where persistent high inflation combined with high unemployment and stagnant demand prevails in a country’s economy.

NRB data shows consumers across all ecological regions have been hit by rising food prices, with consumers in the Kathmandu Valley affected the most.

The price index in the Kathmandu Valley increased by 11.8 percent, followed by 11.4 percent in the hills, 9.6 percent in the mountains and 9.1 percent in the Terai.

The central bank blamed the protracted strikes and tensions in the Terai — resulting in blockading of trade in the southern part of the country and the ensuing trend of hoarding of essential items — as the major reasons for the rise in inflation.

“Most projects of the government and the private sector are stalled and industries are either closed or not able to run 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 country’s output has fallen significantly,” said Nar Bahadur Thapa, executive director at the NRB’s Research Department.

“However, prices are in ascending mode since the last few months. We are facing stagflation,” he warned.

According to the Federation of Nepalese Chambers of Commerce and Industry, 90 percent of industries and businesses in the southern plains have shut down, wiping out some 220,000 jobs.

The government, in a white paper released recently, revised the economic growth projection downward to 2 percent for 2015-16 from the initial target of 6 percent stated in the budget.

“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.

Prices of both food group and non-food group items have increased due to disturbance in the supply system and the fuel crisis.

The NRB report shows that prices of food items increased by 12.1 percent while non-food items showed a 9.2 percent increase.

Except for vegetables and meat, prices of almost all food items have gone up.

The sharpest rise has been seen in pulses and cooking oil, whose prices have gone up by a whopping 44.1 percent and 41.1 percent, respectively.

From the non-food groups, clothes and footwear have witnessed the highest price rise of over 14 percent.

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