Monday, July 25, 2011
Are we stuck with high inflation?
The Republica link is here
Inflation in Nepal during the 1990s was high. Everything in the market—from a nail to a kilogram of rice to a car—was expensive. Nepal had just got democracy in 1990, and needed time to bring things in order. Policymaking—monetary or fiscal—was affected due to multiple changing of governments throughout the 1990s. Therefore, inflation during that decade stayed high, with the highest being 21 percent in 1992. After 1992, it started declining and was 7 percent in 1995. But, the unstable civil, political, and economic climate created by the start of the Maoist rebellion in 1996 resulted in inflation creeping up again to 11 percent by 1999.
Despite the political fracas and the strengthening Maoist rebellion, decade of 2000 brought better policies and saw decent economic growth. Inflation kept falling, and was even negative during 2004. When Maoists stepped up their final push, the resulting disorder, chaos and frequent shutdowns hampered economic policies. Inflation rose to 11 percent in 2005. When Maoists laid down their arms in 2006, their subsequent inclusion in the political process was followed by lower inflation in 2006 and 2007.
Average inflation in Nepal was 6.2 percent in 2006/07. By 2008/09, it more than doubled to 13.1 percent—the worst in the decade. Most of the increase could be explained by the frequent shutdowns and roadblocks during that year. Despite being relatively unaffected by the worldwide financial crisis of 2008, poor economic conditions meant that inflation stayed at 13 percent in 2009. Improved conditions in 2009/10 lowered it to 11 percent in 2010. However, this was still higher than what we as consumers had bargained for. Today, the good news is that it has been falling again. The bad news is that it is not falling fast enough.
International Monetary Fund (IMF) has predicted that average inflation is going to be around 8 percent in 2011, 5.5 percent in 2012, and 5 percent thereafter until 2015. But, it is not clear if IMF’s predictions are for core inflation or for headline inflation. There is a difference because core inflation does not include the inflationary impacts from the volatile fuel and food sectors. Even if IMF’s numbers are correct, these predictions have to be taken with a pinch of salt because these seem to be nominal values. Real inflation is still high. It will stay high unless rising fuel and food prices are not contained.
Technically, inflation is measured as a change in the Consumer Price Index (CPI) where CPI represents the prices in the market for various goods and services. Economists and policymakers do not like inflation. An increase in inflation reduces a person’s real purchasing power in the market with his/her level of income. Higher and fluctuating inflation rates make the market conditions unstable and uncertain. That, in turn, results in monetary policies becoming ineffective in obtaining their objectives.
Inflation is especially important to monetary policymakers in Nepal Rastra Bank (NRB). However, two major problems confound the NRB’s policymakers and make their jobs difficult. First, inflation is a self-fulfilling prophecy in the sense that inflationary expectations of people—about what the future inflation could be—contributes to the actual inflation in the future. Second, when NRB implements a monetary policy this quarter to tackle inflation, the results of its effectiveness will not appear until the next quarter or two. These two problems make their decision of implementing effective monetary policy against inflation all the more difficult.
Although very little can be done to avoid these, we can at least attempt to measure them. In many countries, these are estimated through surveys that measure consumer confidence. A survey this quarter would ask consumers about their inflationary expectations of the future. Thus, such surveys would provide policymakers with at least some reasonable information about consumer expectations, and therefore, direction of future inflation.
Conducting such a survey in Nepal would help NRB’s policymakers. After all, nobody knows the market better than the consumers who deal with changing market prices day in and day out. Collective wisdom of everyday consumers engaging in the market is a lot better than that of two NRB policymakers trying to figure out market behavior in their office rooms. These surveys are very easy to conduct. Frankly, I don’t know why NRB has not conducted them, yet.
In recent years, there have been improvements in some sectors in Nepal, and prices have stabilized in many parts of the economy. But, high inflation persists today with 70 percent of the rise being attributed to the rise in basic food prices. Changing climate, erratic rainfall, shortage of agricultural labor, reduced agricultural productivity and rapid urbanization in the last decade have been the main reasons why food prices have risen by an exorbitant rate. That, in turn, has fed the rising headline inflation.
Food prices are the largest part of Nepal’s CPI. So, rising food prices are the reason why inflation has not fallen faster in Nepal. Any drop in inflation from other sectors keeps being negated by the increase in food prices. Our increasing population and increasing per-capita income has meant that our demand for food is also increasing. However, a huge percentage of food that we consume is imported. Duties, taxes, transportation costs, and competition among consumers make the food that we consume expensive for us. Unless increasing demand is met by increasing supply, we will keep suffering due to food deficit and food-caused inflation.
There are two choices to significantly reduce inflation in Nepal: We increase our food production, or we switch our diet to include more locally grown food. The second option is improbable because no consumer likes being told what or what not to eat. So, the only option left is to increase production. But, given how our agriculture and food production has been on a decline for years, an increase in production is not going to happen anytime soon. Therefore, we are stuck with high inflation rates, hovering at a minimum of 8 percent, for another decade. Our only hope is a miracle.
This opinion piece was published in Republica on July 25, 2011
Inflation in Nepal during the 1990s was high. Everything in the market—from a nail to a kilogram of rice to a car—was expensive. Nepal had just got democracy in 1990, and needed time to bring things in order. Policymaking—monetary or fiscal—was affected due to multiple changing of governments throughout the 1990s. Therefore, inflation during that decade stayed high, with the highest being 21 percent in 1992. After 1992, it started declining and was 7 percent in 1995. But, the unstable civil, political, and economic climate created by the start of the Maoist rebellion in 1996 resulted in inflation creeping up again to 11 percent by 1999.
Despite the political fracas and the strengthening Maoist rebellion, decade of 2000 brought better policies and saw decent economic growth. Inflation kept falling, and was even negative during 2004. When Maoists stepped up their final push, the resulting disorder, chaos and frequent shutdowns hampered economic policies. Inflation rose to 11 percent in 2005. When Maoists laid down their arms in 2006, their subsequent inclusion in the political process was followed by lower inflation in 2006 and 2007.
Average inflation in Nepal was 6.2 percent in 2006/07. By 2008/09, it more than doubled to 13.1 percent—the worst in the decade. Most of the increase could be explained by the frequent shutdowns and roadblocks during that year. Despite being relatively unaffected by the worldwide financial crisis of 2008, poor economic conditions meant that inflation stayed at 13 percent in 2009. Improved conditions in 2009/10 lowered it to 11 percent in 2010. However, this was still higher than what we as consumers had bargained for. Today, the good news is that it has been falling again. The bad news is that it is not falling fast enough.
International Monetary Fund (IMF) has predicted that average inflation is going to be around 8 percent in 2011, 5.5 percent in 2012, and 5 percent thereafter until 2015. But, it is not clear if IMF’s predictions are for core inflation or for headline inflation. There is a difference because core inflation does not include the inflationary impacts from the volatile fuel and food sectors. Even if IMF’s numbers are correct, these predictions have to be taken with a pinch of salt because these seem to be nominal values. Real inflation is still high. It will stay high unless rising fuel and food prices are not contained.
Technically, inflation is measured as a change in the Consumer Price Index (CPI) where CPI represents the prices in the market for various goods and services. Economists and policymakers do not like inflation. An increase in inflation reduces a person’s real purchasing power in the market with his/her level of income. Higher and fluctuating inflation rates make the market conditions unstable and uncertain. That, in turn, results in monetary policies becoming ineffective in obtaining their objectives.
Inflation is especially important to monetary policymakers in Nepal Rastra Bank (NRB). However, two major problems confound the NRB’s policymakers and make their jobs difficult. First, inflation is a self-fulfilling prophecy in the sense that inflationary expectations of people—about what the future inflation could be—contributes to the actual inflation in the future. Second, when NRB implements a monetary policy this quarter to tackle inflation, the results of its effectiveness will not appear until the next quarter or two. These two problems make their decision of implementing effective monetary policy against inflation all the more difficult.
Although very little can be done to avoid these, we can at least attempt to measure them. In many countries, these are estimated through surveys that measure consumer confidence. A survey this quarter would ask consumers about their inflationary expectations of the future. Thus, such surveys would provide policymakers with at least some reasonable information about consumer expectations, and therefore, direction of future inflation.
Conducting such a survey in Nepal would help NRB’s policymakers. After all, nobody knows the market better than the consumers who deal with changing market prices day in and day out. Collective wisdom of everyday consumers engaging in the market is a lot better than that of two NRB policymakers trying to figure out market behavior in their office rooms. These surveys are very easy to conduct. Frankly, I don’t know why NRB has not conducted them, yet.
In recent years, there have been improvements in some sectors in Nepal, and prices have stabilized in many parts of the economy. But, high inflation persists today with 70 percent of the rise being attributed to the rise in basic food prices. Changing climate, erratic rainfall, shortage of agricultural labor, reduced agricultural productivity and rapid urbanization in the last decade have been the main reasons why food prices have risen by an exorbitant rate. That, in turn, has fed the rising headline inflation.
Food prices are the largest part of Nepal’s CPI. So, rising food prices are the reason why inflation has not fallen faster in Nepal. Any drop in inflation from other sectors keeps being negated by the increase in food prices. Our increasing population and increasing per-capita income has meant that our demand for food is also increasing. However, a huge percentage of food that we consume is imported. Duties, taxes, transportation costs, and competition among consumers make the food that we consume expensive for us. Unless increasing demand is met by increasing supply, we will keep suffering due to food deficit and food-caused inflation.
There are two choices to significantly reduce inflation in Nepal: We increase our food production, or we switch our diet to include more locally grown food. The second option is improbable because no consumer likes being told what or what not to eat. So, the only option left is to increase production. But, given how our agriculture and food production has been on a decline for years, an increase in production is not going to happen anytime soon. Therefore, we are stuck with high inflation rates, hovering at a minimum of 8 percent, for another decade. Our only hope is a miracle.
This opinion piece was published in Republica on July 25, 2011
Labels: central bank of nepal, inflation, Nepalese Economy
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