Impact Of Inflation

Despite financial stability and modest increase in remittances, Nepal continues to endure the economic woes. Its efforts to sustain the positive economic indicators achieved in the last fiscal year have not been duly paid off. Nepal Rastra Bank’s annual report of the macroeconomic situation published on Tuesday shows the level of import trade increasing, putting heavy pressure on the foreign exchange reserves. There has not been substantial growth in export but consumption has increased exponentially, posing a serious threat to the manufacturing and agriculture that form the core of national economy. Widening trade deficit and expenses on unproductive sector has obviously put the economy in the red. The runaway inflation is a real headache that has affected all segments of the economy. 

The post-COVID recovery pace has slowed down with the hike in the prices of fuels and food in the international market, especially in the aftermath of the Russian-Ukraine war. The country’s economy is buffeted by the consumer price inflation, depleting foreign exchange reserves, current account deficit, stunted growth of remittance inflow and decreased capital transfer, according to a news report published in this daily. The consumer price inflation hit 8.08 per cent in mid-July 2022 against 4.19 per cent of the previous year. But, the inflation has been driven by non-food and services sectors that stood at 9.03 per cent by the end of the last fiscal year. It was just 2.94 per cent in mid-July 2021. The rising transportation cost has been attributed to the hike in the prices of essential items. The transportation costs soared by 15.82 per cent, which pushed up the price of ghee and oil by 26.13 per cent last year.

 Likewise, pulses, legumes, and tobacco prices were up by 9.92 per cent and 9.84 per cent. The government was compelled to jack up the prices of the fossil fuel and fare of passenger and cargo transport due to the increase in the price of petroleum products in the international market. Supply chain disruption and devaluation of Nepali currency against the dollar also led to steep rise in inflation that has hit hard the daily life of commoners particularly in the hills and the Terai region. Another worrying scenario is that the current account remained at a deficit of Rs. 623.33 billion during 2021/22 compared to a deficit of Rs.333.67 billion in the previous year. The capital transfer decreased by 34.5 percent to Rs. 9.99 billion and net foreign direct investment (FDI) decreased by 4.9 per cent to Rs. 18.56 billion. 

The Balance of Payments (BoP) remained at a deficit of Rs. 255.26 billion in the review year against a surplus of Rs. 1.23 billion in the previous year. Gross foreign exchange reserves decreased by 13.1 per cent to Rs. 1215.80 billion in mid-July 2022. Modest achievements have been made in remittance, tourism and electricity. Remittance inflows have increased by 4.8 per cent to Rs.1007.31 billion during 2021/22 compared to 9.8 per cent in the previous year. In a similar manner, the number of tourist arrivals increased significantly to 370,906 in 2021/22. The installed capacity of electricity increased to 2189.6 megawatt in 2021/22. The country has also earned foreign currency by selling electricity to India, which is expected to improve the BoP situation. If the remittances are channeled into productive sectors, this will help to cushion the economy against the potential downturns.