Nepali Times
ARTHA BEED
Economic Sense
Understanding inflation


ARTHA BEED


Last week, more than a dozen people died in Maputo, the capital of Mozambique, in a week-long riot caused by a 30 per cent price hike in food and other basic necessities. We may not know the official inflation rate in Nepal, but ask any householder who shops for groceries â�" prices change with each visit to the market. Rates in restaurants have increased and the cost of living, calculated on the backs of envelopes since we don't have credible indices, shows that it is getting dearer to live in Nepal, especially in Kathmandu. For Nepal, the increase of a single rupee in the international market or production centres means a greater increase in price for consumers.

The beed always wonders why his favourite egg rolls at roadside stalls cost just IRs 13 (Rs 21) in Kolkata but Rs 50 in Kathmandu. No meal in Kathmandu, even in stalls at the bottom of the pyramid, is available at a price less than Rs 50; whereas in many cities across south Asia, you can still eat at stalls for less than Rs 25. Is it the cost of production, or is it that we are used to high margins? Many companies who operate in different geographies admit that Nepal has too many intermediaries and that retail margins here are the highest in the region. Therefore, until some large-scale retail operation that will reduce prices sets up shop here, consumers will continue to pay more.

The prices are also high because our labour costs, compared to productivity, are the highest in the region. We require more people to man our restaurant kitchens and production lines. With many holidays and the constant rise in wages along with diminishing productivity, labour costs are always on the up.

Besides, Nepalis are always on the lookout for opportunities to arbitrage. So any news of shortages, festivals, or other events that cause major shifts in demand mean prices spiral, as people love to hoard and make extra money. It is questionable how petrol stocks evaporate from underground tankers as soon as gas stations hear of a landslide, a strike on the highways or a rise in oil prices in India.

The other major cause for price rises is our love of cartels. Transport entrepreneurs have ganged up to overprice transportation costs, making them among the highest in south Asia. Hair dressers have banded together to fix minimum rates and so have gold vendors. The fact that different gold associations fight tooth and nail over fixing prices and quotas makes us wonder if they are government agencies or the private sector. But the Nepali private sector, too, loves protectionism and continues to find ways of making money by fixing prices and quantities.

The consumers are partly to blame. Nepali consumers are not adamant about getting their money's worth. How many times have you seen people refusing to pay for a badly cooked dish at a restaurant or faulty service from cell phone operators? Lax attitudes mean suppliers of service can get away with increasing charges for low-quality products. Compared to the value of assets, rents are still lower than in most low or middle-income countries. If this goes up too, it will have a multiplier effect on wages and product prices, making heady inflation a distinct possibilty.

We need updated and reliable figures on inflation so that we can start being proactive in understanding price rises. A high rate of inflation increases income inequality, and for every high-end house that is occupied, we will see another ghetto. If we cannot understand and deal with price hikes, then the streets of Kathmandu may soon see riots like the one in Maputo.

www.arthabeed.com



1. slarti

Great stuff Beed.

I don't believe what you say is the complete picture, the government inefficiency and complicity in allowing the lack of governance to prevail is responsible. This also requires detailed investigation and the numbers are available to infer a conclusion in this direction.

However, I need to understand a few things, you ask "or is it that we are used to high margins?"

Are we, and who is not? Is supply and demand not determine prices? I know what you are trying to say, I just think that you are saying it the wrong way, perhaps??!??

Secondly, the fact remains that if these are the prices that are being charged, and that these are higher than the near neighborhood, someone should have got into the business, could you shed some light on why nobody is doing that?

I can understand cartelisation in transport, but in egg-roll stalls? Also, I am not sure standard pricing by barbers is cartelisation, it is for your own convenience since I hardly believe it is necessary for everybody to haggle over the price in all transactions?

I gather your point about labour costs. In this regard, the propensity for low-skilled labor to go overseas also plays a role, is this correct?

About your assertion that consumers have a bit of role to play, have you tried refusing to pay the bill???



2. jitendra
Wonderful article. I am glad that someone wrote about it.

Sadly, the planners have no time to think economics and common-man issues. And, the media is too engrossed in being audience to PM race and Dabur-Embassy-Media spat.

I very much agree that consumers are here to be blamed. However, I find it very odd and stupid, particularly in Kathmandu, that your friends grow uncomfortable if you are in argument with shopkeeper/service provider over price. And, you are stared as if to suggest, 'It is 5 rupees only after all. Why are you arguing ???'

It is so unfortunate that we really have no reliable stats/indices about our economic performance. Wish govt. bodies did what they charge tax-payer for.

I would also put some blame on media. They are doing little to provide clear picture to the citizens. Media houses have been simply publishing stats what they receive from NRB and others agencies. The analysis part is dismal. Simply publishing that the inflation rate is 10% makes no sense to a common man. It would have made sense if people could have a projection of the prices of the commodities after 5 or 10 years at that rate.


3. Anil Pandit
Dear Arthabeed,

You analysis of inflation is very interesting, more or less comprehensive except for  you fail to bring in the most important factor for inflation which is total money supply. To understand inflation, without considering monetary policy is incomplete. Inflation happens because government prints money without gold or silver or any commodity backing to fund their programs. This type of currency is called fiat currency. If money supply in the market would remain fairly stable or would be backed by gold or silver, there would be no inflation. If price in one type of goods rise then in another sector would fall, if the money supply is constant.  When government prints massive amount of currency to run their  inefficient program, there will be more currency chasing for few good and services which leads to inflation.



4. hjg
"Rates in restaurants have increased and the cost of living, calculated on the backs of envelopes since we don't have credible indices, shows that it is getting dearer to live in Nepal, especially in Kathmandu." 

Can you show these back-of-the-envelope calculations on a Google Excel?
"The prices are also high because our labour costs, compared to productivity, are the highest in the region." 
And you wanted to re-brand Nepal for investments?


5. Dr B
"We need updated and reliable figures on inflation so that we can start being proactive in understanding price rises." 

My question is "why do we need inflation measures in Nepal and what does proactive mean?" In my own country (UK), inflation and retail price index statistics have a specific purpose that everyone knows about and accepts: For example each or both measures act as thresholds or triggers for something else to happen, such as a rise in state pension benefits which equates to the inflation figure or rpi; equally the figure would be used to control pay/salary negotiations so as not to contribute even further to an inflated economy.
So, in Nepal, how would an accurately known index of inflation be used to benefit the people or institutions? 


6. Ramji

The article is very interesting and has brought up good message; well done for this. If you could bring up comparative details of the inflation rate back from 10 years it would be more interesting and could give more detail information and your analysis would be more accurate.

Bad inflation is a result of poor governance. There is no a concrete provision to survey the market price and take action against the culprit. This is the main reason the market price is soaring high. In Kathmandu consumers are to be blamed and they do not haggle and refuse to pay increased price and report to the concerned. If it is the case of 5/10 rupees they just pay for the items!

 



7. DG
Cartel, corruption, conspiracy, connivance, crony -ness,join hands together in Nepal.
Start from banking; MofFand Rastra Bank Staff instead of monitoring and inspecting 'controlling  help unjustly the banks and make hay. Political bosses go join any  Tom Dick or Harry without verifying one; take the case of Unity.
It needs a Hercules to clean the Augean Stable of Nepal; a political Hercules of course.


8. Satya Nepali

Thanks to the Beed for a very informative article.

I'm surprised to hear, though, that there is no reliable inflation measure in Nepal (?!) What about the CPI (consumer price indices) data published by the NRB every month? According to it, the annual rate of inflation during fiscal year 2009/10 was 10.5%. In July of this year it was 10.1%. Here is the link:

latest data: http://www.nrb.org.np/ofg/recent_macroeconomic/Recent_Macroeconomic_Situation_(English)--2010-08_Text_(Based%20on%20Annual%20data%20of%202009-10)-NEW.pdf

and main page: http://www.nrb.org.np/ofg/press.php?tp=recent_macroeconomic&&vw=10

Can the Beed explain why this is not a useful measure? I can understand that it may not be perfect (what, in Nepal, is?). Maybe there is a margin of error of 1-2 percentage points. It's still usable enough though, isn't it? At around 10%, inflation in Nepal is very high!

...As a comparison, in the US it is currently 1.3% and in the UK 3.1%. In India, however, it is also around 10%. Perhaps this explains a lot why it is also so high in Nepal.

The difference, of course, is that India is also growing at about the same rate, whereas Nepal is stuck at the old 'Hindu' rate of growth. In effect, Nepal has "stagflation" (economic stagnation + inflation) not just inflation. Very, very bad news!



9. Anil Pandit
INFLATION = NOTHING ELSE but INCREASE in MONEY SUPPLY = PRINTING of PAPER called National CURRENCY by Central BANK without any gold and SILVER backing = DEPRECIATION of VALUE OF CURRENCY = YOU END UP PAYING MORE than before because to match the same value you need to put in extra MONEY. It is as simple as that.

I am very sad that this notion was not brought up on this article.

Has any one including BEED wondered where, and how does our so called money comes into existence. Is it backed by anything ? IF it were backed by some commodities than we as a country should be very rich country because we so many billions rupee in existence meaning that much worth of gold or silver. IF not, then prosperity doesn't come from just printing money. If that would be true we nepalese need not work, we could just stay home and government will print money and send it our home as a check and we would spend that money.....

In terms of gold there has never been inflation. Gold has and will always preserve its purchasing power. Since we dont' have any data for Nepal;  I will use an example in terms of dollars.

In 1950 crude oil used to cost 2.77 dollars a barrel and gold would cost 40.25 dollars an ounce. So one ounce of gold could buy 14.5 barrels of crude oil.

Today in 2010  one barrel of crude oil costs: 76 dollars a barrel and one ounce of gold costs 1260 dollars. So one ounce of gold would buy 16.57 barrels of crude oil.
What it tells us about gold is that gold preserves the purchasing power and in terms of gold there will never be inflation. If our currency has been backed by gold or silver, then we would still be enjoying same purchasing power of nepali rupee 50 years ago. I certainly know that there is no currency in this earth at present that is backed by gold or silver. Had it been like that, there would be no financial crisis, boom and bust cycles. I am very saddened by Nepalese government's policy of banning of gold. We should encourage and teach every nepali citizen that gold is only to preserve your wealth and freedom otherwise national and international banking cartel would destroy our wealth. With this inflation rate of 10-12 %, you don't have to be genius to figure out that our currency will lose its 100% value within 10 years.......
It is high time that we should bring monetary policy in the agenda of national debate and we should seriously consider about statute in our constitution; defining the currency of the country. When United States of America was founded, founding fathers new about demerit of paper currency/ fiat currency so they have explicitly mentioned that gold and silver can only be the money of United states and it was the only money till Nixon abandoned gold standard in 1970 .  The key reason why US dollar enjoyed and still enjoying the world reserve currency is because since inception of USA, it was backed by gold and silver; meaning these were silver and gold certificates; so every country on earth started keeping dollar as their reserve currency; but later when Nixon abandoned gold standard virtually all countries were conned by Nixon; still many people in many countries still believe that dollar is backed by gold or silver which is not......

So to understanding inflation it is key to understand gold or silver and US dollar; I hope I answered some the questions which were not addressed by the article;






10. Manoj
@Anil Pandit.
I am glad that you know something about how money works. But in my opinion , fiat money creation with out anything backing (eg. gold) is not a problem. The inflation is not a by product but inherent in the process of fractional reserve banking and the money creation process.  Even during the gold standard, there was not enough gold with the us to back all the dollars they had printed.  Besides, when an economy grows more money is needed in the system which you would not be able to provide when you are tied to the gold unless you increase the supply of gold. But that process makes gold the wealth not money. Should any country find vast reserve of gold or lets say us find a mine of easy gold in some planet, should that make other people lesser in economic terms? My point is the backing by gold is useless. Its the money creation process which is same if you are using gold standard or not that has flaws. New money in all the countries is created out of debt. Simply put whenever any country brings in new money its doing so by issuing bonds and treasuries and interest has to be paid to the borrowed money. But how do you pay the money for interest when you have only created money for the principal? Yes, my friends, you borrow more money. This is the reason almost all the governments of the world are in debt. In US it has reached 60% of GDP, in Japan more than 150% of GDP. The recent crisis in Greece was the result of too much debt. If you see budget of  any country, for example US, billions of dollars are allocation for the payments of interest alone. This system of money requires perpetual economic growth and we begin to have problems when the economic growth is less than the interest rates that government has to pay money for and we pay money for loaning from banks. So the economic calamities are bound to happen in this system and money gets collected at hand of few. I don't know what's the solution but I can definitely say that inflation is mainly due to money creation process and backing money buy gold does not solve problem .


11. Anil Pandit
@ manoj, I am glad that I was able to drag some into discussion the real issues regarding inflation. I clearly understand how inflation is created and it can be curved. You are absolutely right when you said money is created at as a debt.
Well in principle you agree that debt based monetary system is the real problem and we can discuss about ways of dealing with. Clearly in last half century fiat monetary system has proven to be utter failure...

let me explain to you my point why gold backing or that matter backing with any commodity works. I will give you an example of United States of America when US used to create debt free money backed by gold and silver. There was no inflation at all for more 200 years. Only time when United states witness inflation was at the time of war when they temporarily abandoned gold standard.

All this fiasco of debt based monetary policy started with establishment of Federal Reserve  1913 which primarily gave power from congress to a group of private bankers in the United States to issue currency and loan it out to bank and the government in the interest. prior to that United States Treasury would issue dollars directly without any debt. So United States was debtor nation during that time.
The following graph explains with creation of Federal Reserve and abandoning of gold standard in 1970, CPI or inflation has gone through the roof in the United States. The real reason United States abandoned gold standard in 1970 by Nixon was because they had printed to much paper money not actually backed by gold and silver, (thank of fractional Reserve banking another ponzi scheme) so they didn't have enough gold to pay back. The reason we want commodity backing:  that way it limits government (politicians) from doing inefficient things; spending our money for their self interest..
To me when economy grows the prices should actually fall. Falling prices are very good thing, then the purchasing power and living standard of common citizen will go up. That's what free market does. With competition, technology, productive capacity of a society grows faster than money in existence... so prices would fall; I will give you an example; when we bought computers  in Nepal in 1990's; I still remember we paid 65000 rupees; now we can buy 100 times more efficient computer for 10-15000 rupees. That's because of free market, competition and technological advancement which converse to one point as increased in productive capacity.


I agree to you hypothetical scenario where a country can find a huge reserve of gold than that country becomes richer. Still I would favor that, because gold can't be created out of thin air. One ounce of gold is equivalent of production costs of one ounce of gold and some one has to go out and mine that gold. Whereas paper currencies can be printed overnight in huge sum and can be circulated in the market.....

Another point against fiat money system is on historical basis. This is not the first time in history of human kind that we have seen failure of paper currencies. Paper currencies existed in ancient China, and even in the US; all the colonies were printing their own paper currencies which eventually got destroyed to their intrinsic value which is zero. But gold and silver has existed and are in circulation for more than 5000 years.

Bottom line: I believe any currency of any country should be backed by commodities gold, silver  or something. This idea of fiat currency; being able to create money of thin air is immoral; it is counter-fieting; eventually those who believe in this system will destroy themselves and others.


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638
(11 JAN 2013 - 17 JAN 2013)


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