| October 25, 2020

Budget's inflation target leaves NRB in fix

"The inflation target of the government is extremely hard to attain given the expansionary nature of the budget and the goal of higher economic growth."
KATHMANDU, May 30: Finance Minister Bishnu Prasad Paudel's announcement in the budget speech to check the inflation at 7.5 percent has put Nepal Rastra Bank (NRB) in a fix.

There are worries that the budget tabled by the government for upcoming fiscal year 2016/17 at the Legislative Parliament on Saturday is likely to spur inflation.
Some central bankers say that the government has put the central bank in a tight spot as it cannot challenge the government target. "The inflation target of the government is extremely hard to attain given the expansionary nature of the budget and the goal of higher economic growth. We cannot go against the government announcement as our voice should be in line with that of the finance ministry," a senior official of the NRB told Republica upon the condition of anonymity saying that his comment may jeopardize relation with the MoF officials. "If the NRB puts similar target in its monetary policy, nobody is going to believe that inflation will remain at that level," the official added.

Inflation has remained above 8 percent on an average for the last five years.

The huge capital spending plan and salary increment of the government staff by whopping 25 percent are the two major factors that economists attribute to the possibility of further hike in the inflation, which has already crossed double digits in the current fiscal year. Inflation, as measured in consumer price index (CPI), had climbed to 12.1 percent in mid-January due to the supply disruption resulting from the Tarai turmoil and the Indian blockade. The average inflation rate for this year is estimated to remain at 9.5 percent in the current fiscal year 2015/16.

Many economists say that the government's target to tame the inflation at 7.5 percent while achieving the economic growth rate of 6.5 percent is simply 'unrealistic'.

Senior economist Madan Kumar Dahal told Republica that the central bank is bound to bring a monetary policy to support the implementation of the budget. "However, the size of the budget which has also allocated a significant portion of the resources for the constituency development fund is going to drive up inflation," he added.

Though the government has announced some measures to address the supply constraint, which is largely responsible for the spike in inflation, many believe that such attempts are not enough to control inflation. In his budget speech, Finance Minister Paudel has announced that the government will exact compensation from the strike enforcers.

However, some NRB officials told Republica that the inflation target was still achievable if the supply bottlenecks are removed. "The rise in inflation in Nepal is mainly due to constraints/disruption in the supply system. If the government cracks down on the cartel responsible for price rises, the central bank can tame the demand-fueled inflation through its monetary instruments," said Min Bahadur Shrestha, an executive director at the NRB.

According to a study, increase of money supply by 1 percentage point pushes up inflation by 0.3 percentage point. The increase in the budget means there will be more money in circulation due to increased government spending and hike in the salary of government staffers and these will cause the inflation to go up.

NRB Executive Director Shrestha, however, said that NRB will try to control the money supply by mopping up liquidity.
Sagar Ghimire

Ghimire is associated with Republica, English National Daily, since November 2013. He reports and writes on banking, financial, cooperatives, labor and foreign employment issues.


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