Inflation biggest challenge to economy: ADB

KATHMANDU, APR 02 -

The Asian Development Bank ( ADB ) has said that inflation remains one of the biggest challenges to the Nepali economy as it is not showing signs of slowing down significantly anytime soon.

The rate of inflation has surpassed 9 percent in the last five years except in fiscal year 2011-12 when it had dipped slightly.

The Asian Development Outlook 2014, released by the bank on Tuesday, projected that inflation would remain at 10 percent in this fiscal year and 9.5 percent in the following year. Nepal Rastra Bank (NRB) has targeted to keep it at 8.5 percent this year.

“Taming high inflation, which erodes consumers’ purchasing power and makes producers less competitive, is one of the country’s major macro-economic challenges,” stated the report.

Wage pressures, higher fuel prices, high inflation in India, a weak currency, a persistent power deficit and supply side constraints are major drivers of higher inflation in Nepal, according to the ADB .

Although Nepal’s price rise trend has traditionally moved in tandem with developments in India, there has been a deviation in this trend since 2007.

Supply side constraints such as power outages, transport bottlenecks and market price distortion imposed by syndicates and middlemen have played major roles in keeping inflation high, according to the ADB .

“Syndicates’ arbitrary price hikes in transportation costs and the widening gap between farm gate prices and retail prices-estimated to be at least 40 percent in the case of fresh vegetables-have propped up high inflation,” stated the report. It pointed out that despite syndicates and anti-competitive practices have been banned, enforcement remains weak.

The bank has asked to end the uncertainty over supplies of motor fuel and cooking gas, and take appropriate steps to boost agricultural production to reduce imports and end practices of syndicates.

Regarding economic growth prospects, the ADB has downgraded the projected growth rate to 4.5 percent against the government’s target of 5.5 percent.

The ADB has pointed to low capital expenditure despite a timely budget and sluggish performance of the manufacturing sector as the main factors that would put a limit on growth prospects despite positive political developments and a good monsoon.

Capital expenditure was recorded at 24 percent as of March 25, and the ADB said that the capital budget was unlikely to be fully spent.

Chandan Sapkota, associate economics officer at the bank said that the government would see a budget surplus in the current fiscal year like in the last fiscal year due to its failure to spend the development budget.

“It is not a good sign for a country like Nepal which has to spend huge amounts on its poor infrastructure,” he added.

The ADB has projected a growth rate of 4.7 percent for the next fiscal year 2014-15.

The balance of payments is expected to remain strong due to increased remittance and higher income from tourism. An increase in the number of migrant workers going abroad, higher pay packages and a stronger incentive to send money home due to a depreciation of the domestic currency will result in higher remittance flow, according to the ADB .  Exports are projected to increase by just 3 percent against import growth of 15 percent. The bank has also expressed doubts whether the government would be

able to collect the targeted amount of revenue in a situation of slowed imports considering that no major changes in the tax structure have been made.

The ADB has projected a positive outlook for the financial sector stating that it is stabilizing after higher excessive credit expansion and subsequent break in the real estate boom in fiscal 2010-11.

Source: The Kathmandu Post