Maintain Economic Stability

Economic growth and stability are two major objectives of every developing economy. When devising fiscal and monetary policy every year our government also aims to achieve high rate of economic growth by maintaining macroeconomic stability. Low unemployment, low inflation, exchange rate stability and favourable balance of payment are key indicators of macroeconomic stability. Theoretically, high rate of economic growth and price stability are self-contradictory. It is very hard to achieve a high rate of economic growth rate at the same time limiting the inflation at the lower level. Generally, when we try to scale up the economic growth by spending more, it consequently increases the demand in the economy and price level will go up. The government of Nepal has recently unveiled its annual budget for the coming fiscal year 2022/23 targeting to achieve the growth rate of 8 per cent by maintaining the inflation rate at 7 per cent.

However, when we look at the major macroeconomic indicators of the Nepali economy at present, the situation of both the economic growth and stability are far below the target of existing fiscal and monetary policies. The economy is expected to grow by less than 5 per cent and the inflation is constantly going up. This shows the sign of stagflation in the economy. At the same time, alarming deficit in trade and balance of payment, and the depleting foreign currency reserve are also posing a big threat to the economic stability. Not only in Nepal, skyrocketing prices of goods and services have been a global phenomenon after the Russian evasion of Ukraine and the counter response of western allies to Russia in the form of economic sanctions. Most of the countries are now facing high rate of inflation mostly in food items triggered by high fuel prices. 

According to a news report published in this daily on Tuesday, the year-on-year consumer price inflation has reached 8.56 per cent by mid-June. The inflation rate is constantly rising every month. It was 7.87 per cent by mid-May. During the review period, the balance of payment deficit of the country stood at Rs. 269.81 billion. High trade deficit and slow growth of remittance inflow is leading to high balance of payment deficit in the economy. However, some positive signs on remittance inflow and balance of payment deficit have been seen. During the review period, the remittance inflow has increased by 3.8 per cent. The y-o-y growth of remittance was only 0.2 per cent and the balance of payment deficit was Rs. 288.50 billion by mid-May. The gross foreign reserve has also increased to USD 9.45 billion in mid-June from USD 9.28 billion in mid-May.

As the economy is already passing through internally and externally influenced instability with low economic growth rate, it will be very hard to achieve both the stability and growth targets if the international situation remains unchanged. The government and the central bank should therefore focus on discouraging domestic factors fueling inflation. Likewise, the import of luxurious items should be discouraged with import substitution while promoting domestic production. When the central bank is in the process of formulating monetary policy for the next fiscal year 2022/23, emphasis should be given in maintaining internal and external sector stability rather than worrying on the growth rate target set by the fiscal policy. Further instability in the economy will be more worrisome and could have adverse distributive effect in the economy pushing a large section of people below the poverty line.