Is the Stagflation-Recession Coming to Nepal? Are you Planning for it?
Monetary Policy Expectations
In a recent discussion held to discuss the upcoming monetary policy of the NRB, Governor Maha Prasad Adhikari hinted that our economy will soon be experiencing the effects of global stagflation or recession. He addressed the ongoing high inflation and stagnant economy and mentioned that it is high time to start preparing for the upcoming hardship and urged all the concerned bodies to work in collaboration to tackle the issue.
Stagflation is used to address the economic situation which is characterized by slow economic growth, rising prices, and high unemployment. It describes an economy where economic growth goes down, but the prices keep going up. The major driver of stagflation is the increasing commodity prices- like oil, food prices, fuel, and other general consumables of general people.
We are already experiencing inflation in the basic consumables like food items, cooking oil, construction materials, and fuel prices. The inflation in these products will ultimately trigger inflation in all other products. It seems like the situation of stagflation is inevitable in countries like Nepal.
So, how can we prepare ourselves for this situation?
- As a whole economy:
The situation of stagflation is believed to end only after dragging the economy into the recession. The increasing prices and growth slump will increase unemployment. The regulatory will increase the interest rates to address the increasing prices and reduce consumer spending. The increased rates will increase the cost of doing business and the business start slashing the employees to reduce their costs which in turn increases the unemployment. This will result in the situation of recession where this vicious cycle is repeated. The inflation will ultimately be controlled by the reduced consumer spending due to unemployment and high borrowing cost resulting in lower demand for products.
It is often believed that the problem of unemployment can be addressed with more ease than the problem of inflation. Hence, in the situation of stagflation, the government will increase the interest rates to decrease consumer purchasing power. If the regulatory body decreases the interest rates to increase the business activity, the inflation might get out of control and the whole economy might turmoil.
The recent discussion by the governor points out that the upcoming monetary policy will be in line with this theory of economics. The interest rates will not go down for now but might increase if the situation worsens. So, we should start to prepare ourselves to tackle the increasing borrowing costs and slowing business activities which will further worsen in the coming days.
- As a Business (Start-up or established business):
Business leaders must always prepare themselves to adapt to any economic changes. The business is going to have a tough time as the costs keep rising and the demand for the products keeps slumping due to increases in prices. Businesses whether small or large should focus on the following ideas to manage the risk due to stagflation:
- Business should find the opportunities to reduce their costs including high fixed costs. This might be reducing the fuel consumption, reducing the employee fixed costs, reducing the shipping expenses by improving the supply chain, increasing the bargain with the suppliers by ordering in bulk, etc.
- Business should increase their productivity and avoid indirect losses as far as possible. They can opt for the technology-driven process to identify the losses and streamline the business processes.
- Businesses should bargain their payables for more credit periods and tighten up the receivables as far as possible.
- Business should look for opportunities for merger or acquisitions. It is hard for a small business to survive during the stagflation but acquiring or merging will benefit the business by bringing in the economies of scale and thus a large business can focus on reducing the costs or improving the quality which will keep the demand for the products in the market.
Stagflation is really a tough situation for economy and businesses. Costs keep rising and the sales will decrease due to high prices and low consumer purchasing power. The economy will turmoil due to high unemployment and higher borrowing costs. Businesses can take the opportunity to investigate their core business practices and improve their products and processes. Companies should focus to reduce their debt and improve their productivity by cutting unnecessary costs.
I expect the upcoming monetary policy to address these situations that the world and Nepal have already started to face. The monetary policy should focus on solving the issue that might occur in the future rather than addressing the current problem of general expectations.
CA Bimal Dhungel
https://www.linkedin.com/in/bimal-dhungel-914444128/
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