Inflation biggest challenge to economy: ADB
Inflation is going to be the biggest challenges for Nepal, according to a new report.
The Asian Development Bank (ADB) flagship publication – released today – said that inflation remains one of the biggest challenges to the Nepali economy as it is not going to slow down.
"The rate of inflation has surpassed nine per cent in the last five years except in fiscal year 2011-12 when it had dipped slightly," said the Asian Development Outlook 2014.
It has also projected that inflation to remain at 10 per cent in the current fiscal year 2013-14 and 9.5 per cent in the next fiscal year.
However, central bank's monetary policy and government's fiscal policy had promised to contain it at 8.5 per cent in the current fiscal year 2013-14.
"Taming high inflation, which erodes consumers' purchasing power and makes producers less competitive, is one of the country’s major macro-economic challenges,” the report said, adding that wage pressures, higher fuel prices, high inflation in India, weak currency, persistent power deficit and supply side constraints are key drivers of higher inflation in Nepal.
Though, Nepal’s price rise trend traditionally moves according to Indian price rise, there has been a deviation in the trend since 2007.
Supply side constraints like regular power outages, transport bottlenecks and market price distortion imposed by syndicates and middlemen have played major roles in keeping inflation high, it added.
"Syndicates' arbitrary price hike in transportation and the widening gap between farm gate prices and retail prices-estimated to be at least 40 per cent in case of fresh vegetables-have propped up high inflation,” according to the report that has pointed out that despite syndicates and anti-competitive practices have been banned, implementation remained weak.
The development partner has also asked to end the uncertainty over supply of vehicle fuel and cooking gas, 'and take appropriate steps to boost agricultural production to reduce imports and end practices of syndicates.'
Economic growth rate downgraded
KATHMANDU: The ADB has downgraded the projected growth rate to 4.5 per cent against the government’s target of 5.5 per cent in the current fiscal year.
The bank has, however, projected a growth rate of 4.7 per cent for the next fiscal year 2014-15 and cautioned that relatively healthy expansion in the gross domestic product (GDP) should not give rise to inequality.
Despite timely budget, positive political developments and a good monsoon, low capital expenditure and sluggish performance of manufacturing sector limited the growth prospects, the report said, adding that capital expenditure stood at 24 per cent as of March 25. "The capital budget is unlikely to be fully spent."
Associate economist at the bank Chandan Sapkota, on the occasion, said that the country would see a budget surplus in the current fiscal year like in the last fiscal year due to government's failure in development budget. "It is not a good sign for a country like Nepal which needs to spend huge amount on its poor infrastructure."
Likewise, higher remittance-backed consumer demand and uptick in tourism will support service sectors growth at around five per cent," the report said, adding that ever increasing number of migrant workers going abroad, higher pay packages and a stronger incentive to send money home due to a depreciation of the Nepalese currency will result in higher remittance flow. But the exports are projected to increase by just three per cent against import growth of 15 per cent. The report also doubts the government's target of revenue mobilisation due to slow down in imports.
Caution against rising inequality
KATHMANDU: ADB's Asian Development Outlook 2014 – Fiscal Policy for Inclusive Growth – also cautioned that higher economic growth should not transcend into rising inequality, which has the potential to create frustration among people and undermine the success achieved in lifting hundreds of thousands of people out of the poverty trap.
Nepal’s income inequality – according to Gini coefficient – fell to 32.8 per cent in 2011 against 43.8 per cent in 2004. "Nepal’s case is opposite to the Asian trend largely due to continued strong remittance inflows," said country director of ADB for Nepal Kenichi Yokoyama. "But we cannot remain complacent."
Suggesting more spending on public education and health he said more labour-intensive industries should be established to generate jobs at home. "Also, extra funds should be provided to village development committees where there is predominance of poor ethnic communities,” he added.