Stagflation is often a rare but worrying phenomenon that simultaneously stagnates the growth of the economy, but inflation continues to rise as economic recovery seems elusive. According to data on the country’s macroeconomic situation released last week by Nepal Rastra Bank, Nepal’s central monetary authority, consumer price inflation (CPI) in the first five months of the current fiscal stood at 7.11%. Compared to 2.93% last year, exceeding the target of containing it at 6.5% as set by the Bank’s monetary policy for the current financial year. But inflation soared, with the entire banking sector suffocating from a severe crunch in loanable funds in the market, commonly referred to as the “liquidity crunch”.
Nepal’s inflation rate is 1.5 percentage points higher than India’s CPI inflation, which stood at 5.59% in December 2021. This is certainly a source of additional concern given the strict peg of exchange rates between the Nepalese and Indian currencies. This additional inflationary pressure on our economy seems to have been exacerbated by non-monetary factors like poor economic governance.
At the same time, despite Finance Minister Janardan Sharma’s repeated insistence that a 7% economic growth rate is still “easily achievable”. But according to World Bank estimates, Nepal’s economy grew by only 1.8% in 2021 and is expected to grow by 3.9% in the current financial year. He said “poverty is expected to increase, despite increased social protection coverage”. Such a dismal growth performance is also a clear manifestation of Nepal’s institutional inability and lack of political will to take advantage of the bullish growth expectations of the Indian and Chinese economies.
The main concern for the Nepalese economy is that the current phenomena of stagflation, low growth and high inflation seem to persist while the possible paths of recovery seem unclear. Except for some optimism to ease the cash crunch due to a likely increase in government capital spending, which is meager at 13.5% of allocation at the end of the first half. some exercice. However, on the other hand, the trade deficit has crossed Rs900 billion, or 25% of the national economy. The trade deficit trend has now become chronic and poses the greatest risk to economic stability. The dwindling inflow of workers’ remittances, rapidly dwindling foreign currency reserves and widening balance of payments deficit, which has already crossed the Rs 200 billion mark, are impossible to reverse overnight. the following day.
Other key economic indicators to drive growth are also turning desperately pessimistic. Private investment has not increased significantly, the inflow of foreign direct investment is dismal and financial assistance from development partners remains even below the normal average. The performance of Nepal’s main engine of growth, the agricultural sector, paddy production in particular, is expected to be sub-optimal due to heavy destruction of the nearly ready crop by the off-season rains. And to add insult to injury, the outbreak of the third wave of Covid-19 infection has already shown signs of disrupting economic activities. The loss of jobs and productivity will hit hard first, again.
Solutions to most old problems and some new problems don’t seem to be forthcoming. Because, first and foremost, political leaders refuse to accept the harsh reality that the economy is in a rapid downward spiral. Mainly because the Prime Minister and Finance Minister seem unconcerned about the situation, Prime Minister Sher Bahadur Deuba’s lack of interest in appointing the Trade, Supply and Industry Minister for no apparent reason is a clear indication of this indifference. Second, by its very nature, the scattered patchwork of bureaucracy is more reactive in deflecting public criticism than focused on fixing the problem, let alone reversing the trend of draining the public purse. Third, the nation’s fiscal and monetary authorities have failed to recognize the need to separately separate economic problems that can be solved in the short term from those that require a long-term view to solve.
The government has not even taken some essential initiatives at its apparent disposal that could help to calm the situation. For example, a quick review of projects, especially large budget allocations like so-called national pride projects, to identify their spending bottlenecks could increase capital spending. Furthermore, the government must now seriously rethink its hitherto negligent approach in mobilizing economic diplomacy in the interest of the nation.
A functional level of coordination between the federal Ministry of Finance and the relevant provincial ministries in the true spirit of federalism could speed up the tendering process for many medium-sized regional projects. Despite seemingly growing concerns about the economy, the current dispensation did not even deem it necessary to call the meeting of the Intergovernmental Tax Council. Led by the Minister of Finance with Provincial Ministers of Finance as ex-officio members, as provided for in Section 33 of the Intergovernmental Fiscal Arrangements Act, 2017. The Council is in fact intended for a situation like the one currently prevailing “to hold and maintain consultation and coordination between the government of Nepal, the state and the local level on intergovernmental fiscal arrangements. Similarly, the Interstate Council headed by the Prime Minister under Section 234 of the Constitution could also have taken up the matter had it been genuinely concerned about the impending perils.