Tame Runaway Inflation

Today the world has witnessed unprecedented level of inflation. The value of money has declined, with the shortage of commodities. This global phenomenon has also hit Nepali consumers to the hilt as the inflation rate has already reached 7.87 per cent in the first 10 months of the current fiscal year compared to 3.65 per cent a year ago. Being an import-based economy, Nepal has limited measures to tame runaway inflation. Economists basically cite two factors-- demand-pull and cost-push – behind the rising inflation. The demand-pull causes the price hike when the consumers enjoy higher disposable income and want to buy more goods and services. Post-COVID recovery phase saw the rising demands of the goods as there was low production and supply disruption owing to lockdowns and other restrictive measures enforced to control the pandemic.

But now the cost-pull inflation has affected the people beyond the expectation. It caused a widespread shortage of goods because supply decreases when the factories can’t produce goods, as demanded by the consumers. This creates a good pretext for the companies to raise prices to meet the demand, which is also apparently motivated by profit-making urge. Experts argue that demand-driven inflation was to diminish but the sudden Russia-Ukraine war turned the thing upside down again. Russia is not a big economy but it is significant supplier of commodities such as fuels and food (wheat). However, crippling sanction on its economy has discouraged many companies from buying oil from Russia. Similarly, the war has also hampered Ukraine to supply wheat in other nations.  Both Russia and Ukraine supply the world’s 30 per cent wheat.  So the inflation has increased because of constrain in the supply chain.

The Ukraine war has dramatically increased the price of petroleum products and natural gas, which has in turn increased the production and transportation costs, leading to the rise in prices of every commodity. Economists, whom this daily talked with, have warned that the inflation could go up because of both internal and external factors in the future, leaving negative and multiplier effects on its economy. It can hinder the country’s sustainable economic growth. The people with fixed incomes and daily wage earners are bearing the brunt as they have to spend a big chunk of their income on foods. For example, the price of edible oil has gone up by 10-15 per cent in last four months. Nepal imports edible oil from Ukraine. The import of crude oil, along with soybean, palm, sunflower and mustard seeds, has been halted owing to the rising uncertainty.

Inflation has knock-on effect on people's savings and investment, giving rise to negative growth, poverty and inequality. The urban poor are likely to be hit hard more than the village poor because the former have to purchase many items for consumption. Those households struggling to escape from poverty could be driven into it due to inflation, which can delay in achieving the target of Sustainable Development Gaols. Soaring inflation increases the costs of development projects and reduces the competitiveness of exported goods as well as the foreign currency reserves. In order to provide respite to inflation-hit people, the government can lower tax on oil and sales taxes on other goods. Investment in renewable energy can cut dependency on fossil fuels, thereby lessening the production and transportation costs.