State-sponsored economic crisis

Urmila Kapali works as a seamstress in Kathmandu. She has seen her household expenses double in the past six months. Kapali’s son has a job, but his earnings go towards his own family. This joint family of five in Kathmandu is struggling to survive from one day to the next.

Modnath Dhakal from Gorkha has been delivering newspapers door-to-door in Kathmandu for three decades. The rising cost of basic food items, combined with soaring monthly rent for his room, has become unaffordable.

“How are we going to survive?” asks the 70 years old.

Urmila Kapali has to borrow money daily to buy food. She says: “If this continues, I don’t know how much longer we will stay afloat.”

As the world emerged from the Covid-19 pandemic, there has been a global crisis in the supply chain. Just as economies around the world were getting back to normal, Russia invaded Ukraine — setting off a chain reaction of food and fuel price inflation that has affected vulnerable countries the most.

In South Asia, Sri Lanka has officially declared bankruptcy and no longer has the foreign currency to buy any more petroleum. Elsewhere, Pakistan’s foreign currency reserves have dwindled to cover only one month of imports.

Read also: Ukraine crisis hits Nepal economy hard, Ramesh Kumar

India has been relatively unscathed, but even there the inflation rate rose to 7.8%, the highest in eight years. This is directly affecting the price of goods in Nepal.

Two-thirds of Nepal’s imports are from India, most of which are petroleum products. Nepal and India have a fixed exchange rate, which puts Nepal at a disadvantage every time the Indian rupee weakens against the US dollar, as it is happening now.

Nepali consumers are therefore bearing the brunt of rising prices for imported goods and services. Some experts argue that Nepal’s monetary policies have been unable to rein in inflation because of the fixed INR-NPR exchange rate.

Nepal used to import corn, coriander, soybean oil and sunflower oil from Ukraine. The disruption of supply of these goods, along with the shortage of wheat and the global rise in fuel prices and transportation cost, has affected Nepal’s own manufacturing sector.

Nepal’s inflation rate had been increasing at an average of 4.6% for the last five years, but it nearly doubled to 8% in April. Average annual consumer prices are expected to exceed that by the end of this year.

Experts predict that this year’s budget will actually make matters worse. Says economist Keshav Acharya: “This year’s expansionary budget as well as salary increases for government employees will put more pressure on the market and on consumers.”

Nepal’s 15th Five-year Plan had put 18.7% of the population below poverty line, a steady decline in the past 20 years. But now, the progress of the past decades is likely to be reversed.

Read also: How not to be a Sri Lanka, Editorial

The World Bank estimates that about 45% of Nepal's high-risk low-income groups live just above the poverty line. The rising cost of basic food and fuel once again puts them at risk of falling below.

According to the Household Survey of 2017, Nepal’s poorest 10% spends more than two-thirds of the total expenditure on food, while the richest 10% only spends a quarter. A 2019 study by Min Bahadur Shrestha, former deputy chairman of the National Planning Commission, and Shashikant Chaudhary concluded that a 10% increase in the price of food will lead to a 4% increase in poverty.

Inflation has also affected middle-income families, reducing the value of savings as inflation rates soar higher than bank interest rates. Costs of goods from food items and construction material have shot up. Many of Nepal’s ongoing infrastructure projects have been hit by cost overruns and breached contracts.

This is not new. The cycle of high inflation has been going on for decades in Nepal, with an average of 8% increase over the last 40 years. The main reason for this is the 20% annual increase in credit to the private sector by banks and financial institutions over the past decades, which has led to a boost in imports and an increase in real estate prices rather than economic expansion and job creation. Meanwhile, profits generated by the bank's credit flows have helped to enrich the wealthiest by increasing the value of their assets.

With few exceptions, inflation has overtaken monetary policy targets every year. This indicates that Nepal Rastra Bank (NRB) has failed in its responsibility to maintain price stability and curb lending to unproductive sectors.

Moreover, the central bank has increased the supply of money by printing new notes, which automatically increases the cost of goods and services, and decreases the value of money.

Read also: State-sponsored economic crisis, Editorial

Although about two-thirds of Nepal's population is dependent on agriculture, farm yield is not sufficient for farmers to even feed themselves, let alone sell their produce to the market. The government’s chronic failure to import chemical fertiliser means that harvest has declined.

India has begun to control its export of wheat and sugar, and is said to be moving to control rice exports next. As of April 2022, Nepal imported rice worth Rs42 billion, sugar worth Rs4.7 billion, and wheat worth Rs6.32 billion from India. So far, New Delhi has spared Nepal from grain export bans, but that could easily change and spell disaster for Nepal.

Indeed, the disruption of the supply chain has raised fears of a global food crisis, with the worst case scenario being famine in parts of Africa and Asia. The Global Hunger Index 2021 ranked Nepal 76th out of 116 countries in terms of food insecurity. UNICEF figures show that even before this crisis, 43% of children under the age of five in Nepal are undernourished.

Meanwhile, Biswash Gauchan, executive director of the Center for Comprehensive Development Studies, argues that further inflation is inevitable because of the deteriorating international economic situation as Russia’s war on Ukraine drags on and keeps fuel prices high.

“It is normal for inflation rates to be higher in developing countries than in developed ones,” explains Siddharth Bhatt, deputy director of the NRB’s Economic Research Department. “Inflation does not have to always be detrimental if it is in the 2-4% range.”

An NRB study concluded that an annual inflation rate of up to 6.5% will help boost Nepal’s economy. Numbers beyond that would be harmful, says Nara Bahadur Thapa, a former NRB executive.

Read also: “Economy in trouble but no need to panic yet”, Nepali Times

Political intervention could help ease inflationary pressure, but Nepal’s leaders and corporates have a patronage relationship as shown by the influence of some business leaders in drafting recently sacked Finance Minister Janardan Sharma’s budget.

Indeed, the ministry has paid no attention to monitoring the supply and distribution of goods, and existing protocols are ineffective to right what is wrong in the Nepali market.

So far, overseas remittances have saved Nepal from going the Sri Lanka way, but with imports soaring and shrinking foreign exchange reserves the signs are not good.

Economist Keshav Acharya says that the government must immediately set up adequate stocks of food grains and essential food items across all provinces.

“Making these necessary arrangements can save Nepalis not only from food price inflation in the event of a shortage, but also from falling victims to black marketeers and food cartels,” says Acharya.

Amul Kaji Tuladhar of the Nepal Retailers’ Association blames big producers and importers for the inflation because they have been hoarding food items. “If the government had a proper monitoring mechanism to curb speculation of wholesalers, consumers would not have suffered so much,” he says.

Says Keshav Acharya: “Nepal’s poor are bearing the brunt of rising inflation, and things are spiraling out of control, all the while, the government and the opposition, are too distracted with their power games to take decisive action.”

Read also: How Nepal can avert an economic crunch, Kalpana Khanal