Dashain economy amid soaring inflation

PRABHAKAR GHIMIRE

KATHMANDU, Oct 10: “High labor cost, soaring global prices, lower food production and absence of supporting programs to boost domestic food production are major factors driving up inflation in the SAARC region,” Dr Yuba Raj Khatiwada, the governor of the central bank -- Nepal Rastra Bank (NRB) -- said while presenting a paper on ´Food Inflation in SAARC Region´ at the regional conference of SAARC Governors in Pokhara in May 2012.

Factors as outlined by Khatiwada have been more relevant in the contest of Nepal, which is going to face the threat of double-digit inflation this year.

Though the government has set a target to limit inflation to within 8 percent in the current Fiscal Year 2013/14, skyrocketing prices of commodities -- both domestically produced and imports -- has posed a huge challenge to the government to live up to its plan.

Increased outflow of money to the market from the banking system after the timely announcement of the annual budget followed by timely approval of projects, the weakening of the Nepali currency against the US dollar pushing up import bills, the lower volume of imports by traders with the strengthening of the US dollar, the slowing of the industrial sectors that failed to spur domestic supplies on and increasing production cost are responsible behind higher inflation in Nepal.

The value of the US dollar against the Nepali rupees reached a record 109.03 a few weeks back ago, and has been hovering at around 100 in recent days. The rupee stood at around Rs 80 against the US dollar last year.

Average inflation was 9.9 percent during Fiscal Year 2012/13 against the government target to tame it within 7.5 percent. “The slowing supply capacity of domestic industries for local market and increasing dependence on imports on the back of stronger foreign currencies against Nepali rupees is the major obstacle for limiting the inflation within government plan,” said Keshav Acharya, former chief advisor of the Ministry of Finance.

Stronger foreign currencies, especially the US dollar, against South Asian currencies is also expected to inflict the overall economic growth in the economies of the region.
The Asian Development Bank (ADB), in its recent flagship annual economic publication “Asian Development Outlook 2013´ revised down its growth forecast for the south asian region to 6 percent from April´s estimation of 6.6 percent for 2013. For 2014, the growth in the region is expected at 6.2 percent from 6.7 percent projected in April.

ADB has stated that Nepal´s target of 5.5 percent growth in the current fiscal year is also difficult to achieve on the heel of soaring inflation, skyrocketing trade deficit and slowdown in the industrial sector.

Nepal suffered a trade deficit of Rs 523.86 billion during Fiscal Year 2012/13 amid slowing growth of the industrial sector which has been contributing hardly 15 percent in Gross Domestic Product.

Inflation in Nepal in recent year has become highly volatile inflicting the poorest most.
Though inflation moderated to 9.9 percent in Fiscal Year 2012/13 from 14.7 percent recorded in 2010/11, the risk is growing that inflation will hit double digits this year.
Nepal has already been projected by SAARC Regional Poverty Outlook 2009/10 as the country having highest inflation in the region.

The impact of recent hikes in the value of foreign currencies against the Rupee is seen in the import. The swelling of prices of Chinese goods in the market is a case-in-point.
Chinese apples, which used to be far cheaper during the Dashain festival, have become dearer by Rs 20 to Rs 30 per kg compared to local and Indian apples.

Skyrocketing prices of daily consumable goods such as rice, edible oils, pulses, meat and clothing has hit hard those at the bottom of pyramid during the festive seasons.
The stronger value of the Chinese Yuan, along with the US dollar, against the Nepali Rupee has made this year´s Dashain more expensive for the poor mass.
The price of the Chinese Fuji variety of apples jumped to over Rs 100-Rs 110 per kg this year, up from last year’s Rs 80 per kg.

Traders have reduced their import volume on the back of the soaring value of the dollar which has led to a shrinking of supplies in the domestic market.
“Stronger value of foreign currencies and the consequent decline in imports as well as supplies jacked up price of goods in the domestic market,” Dorje Sherpa, who has been importing goods from Tibet for the last few years.

Mimamsa Adhikari, the chief customs officer at Tatopani Customs, said that 544,000 kg of apples worth Rs 16 million entered Nepal from the northern neighbor during the last three weeks. During last year´s corresponding period, 2.42 million kg of apples valued at Rs 47.5 million was imported.

“We saw a drop by 75 percent in the import of apples from China during the last three weeks compared to the amount recorded on the eve of Dashain last year. The stronger US Dollar and Yuan is the major cause behind the plunge in import volume this year,” Adhikari told Republica.
Value of the US dollar had reached Rs 109.03 while Yuan was valued at Rs 18 a few weeks back.

Last year the value of the Rupees against the US dollar and Yuan was around 85 and 13 respectively last year.The case of apples is representative of how the drop in value of the Rupee against foreign currencies impacts the domestic market.

Similar fallout was also witnessed in the arrivals in goats (including mountain goats) in the capital.

Goat traders said around 50,000 goats are expected to enter the capital this year, down from over 70,000 recorded during the Dashain last year.
“We reduced the number of goats to be imported from India fearing possible cold response from consumes to due to higher prices this year,” said Dipak Thapa, the president of Nepal Livestock Traders Association. More than 85 percent of domestic demand for goats is fulfilled from imports from the southern neighbor. Outbreak of bird-flue in the capital in recent months is also another key factor pushing goat prices beyond the affordability of lower class people.

Even the Nepal Food Corporation (NFC) -- the state-owned food supplier -- has reduced the target of selling goats during this Dashain to 2,900 from an earlier plan of supplying 3,400 at subsidized rates during Dashain.

NFC has offered live goats for Rs 370 - Rs 395 per kg while private traders set the price at Rs 385 to Rs 410 per kg.
Though the value of these currencies has moderated, the impact has not been reflected in the prices of imported goods as they were ordered a couple of months back when the value of Nepali currency had dropped to its lowest ebb.

The prices of clothing, home appliances and electronics are not from the cases of apples and goats.
Traders said prices of imported goods have jumped by 30-40 percent depending on their quality.

“A small rise in the price of commodities affects the low-income people as they spend more than 78 percent of the income on consumption,” said Acharya, who is also a former chief at the Research Department of NRB.

Increasing inflow of remittances that swells the circulation of money in the market is also contributing to the high inflation with soaring demands and imports.
“Increasing income of remittance-receiving households drive up the inflation as it creates higher demand and less bargaining trend. But people having no such income will be hardest hit,” said Acharya.

Foreign aid: Aligning Nepal's policies, budgetary system

----------------------------Analysis-------------------------------------- PRABHAKAR GHIMIRE KATHMANDU, Oct 3: The meeting hall of the Ministry of Finance (MoF) was packed with senior representatives of bi-lateral and multi-lateral donor partners on Wednesday. Donors had their grievances to hash out as did the senior Nepali officials present at the donors’ meeting organized to discuss the draft of upcoming Nepal Development Cooperation Policy (DCP) 2013. Nepali officials spoke out about the issues of transparency in foreign aid in the same manner that donors have been demanding proper utilization of their tax payers´ money. In past meetings, Nepali officials used to remain mere listeners of one-sided preaching from donor representatives on development issues, good governance and transparency, effectiveness of aid and the implementation capacity of Nepal. This time, possibly for the first time ever, Nepali officials openly and critically presented themselves before the development partners over the effectiveness of foreign assistance in Nepal. The donor community, which has been asking for transparency in the spending of the budget, themselves seemed to maintaining an opaque system while releasing the assistance -- something which has put more than 23 percent of the foreign aid coming to Nepal out of the budgetary system. “We have records that show that around 23 percent of the foreign aid is still off-budget. We want to urge donor agencies to support us in bringing all the foreign aid amount under our budgetary system so that we can enhance transparency on spending of their aid extended to Nepal,” Chiranjibi Nepal, the MoF’s Chief Economic Advisor, said. Nepal also expressed dissatisfaction that foreign assistance had not been able to play a leading role in bringing down the poverty level in the country. “Over the last decade we have witnessed significant success in reducing poverty in the country. But remittance from Nepali migrants working abroad has been the key factor behind this achievement. We couldn´t utilize donor´s assistance in generating employment that directly benefits the poor,” Nepal added. Having acknowledged that a huge amount of donors´ assistance was spent beyond the government´s radar, the current budget has also pledged to make foreign aid mobilization more transparent and accountable by bringing it under the national budgetary system. Timely reform in the foreign aid policy and integrating an information system relating to foreign aid management are also on government´s agenda in the current budget. A huge amount of foreign aid has been coming into the country through donors´ own agencies and non-governmental organizations without notifying the government. The time has come not only to bring all foreign assistance into the national budget system, but the voice for the need to align foreign assistance in line with the government priorities rather than accepting the conditions of the donors is also getting stronger. “We have brought the billions of rupees mobilized from our own resources into our budget system. Why can´t we introduce the same practice to the receiving and utilizing of the foreign assistance,” Finance Secretary Shanta Raj Subedi said. Keeping in view the practice of off-budget spending of foreign assistances, the government is drafting the DCP, which is expected to regulate foreign assistance and channel it through in a transparent manner to support the government’s priority programs. “We can´t generate better results from the huge foreign aid until and unless we align it with our priority programs and bring it into our national budget system. The proposed DCP has tried to address the challenges seen in the mobilization of external assistance,” Madhu Kumar Marasini, who heads the International Economic Cooperation Coordination Division at the MoF, said. Keshav Acharya, former chief economic advisor at the MoF, also sees off-budget spending of foreign aid having a negative impact on the economy in the long term and adding to the contingency liability of the government. “Flow of foreign currency in an informal way increases liquidity in the market which can´t be tracked by the government. If such liquidity increases without the government´s notice, it will affect the whole money supply and risk the failure of the monetary policy of the central bank,” said Acharya, who is also a former chief of the Research Department of Nepal Rastra Bank. Inflow of foreign aid for different programs through non-governmental organizations bypassing the government system will increase contingency liability of the government after termination of terms of such dependence of beneficiaries of programs. On the other hand, Nepal has to lessen the dependence on foreign assistance on the back of Nepal´s target to graduate from a Least Developed Country (LDC) to Developing Country status by 2022. Nepal will lose privileges such as confessional windows for loans and grants from donors once it graduates to the status. “Nepal has to increase the contribution of revenue to the budget resources to lessen the dependence on foreign aid after it becomes a Developing Country,” Marasini said. In the last few years, revenue has been contributing around 80 percent of the total resources of the budget. However, donors are not showing confidence that Nepal would be able to mobilize the whole aid amount under it budgetary system without enhancing good governance and spending capacity. Though the timely announcement of the budget and the approval of the budgetary programs; filling up of the vacant posts of office bearers in the crucial constitutional bodies; and the formulation of an Approach Paper for the next Three-year plan, were hailed by donors as positive steps taken by the government, they want more effort from the government. “Merely the allocation and approval of the budget is not sufficient, effective implementation of the budget through regular follow ups is equally important,” said Tahsin Sayeed, country manager of the World Bank for Nepal. She drew the attention of Nepali officials to retain the confidence of the public on the government which has been restored with the some positive efforts and initiatives taken by the government.
Published on 2013-10-04 03:51:32