Stagflation looms largeDecreasing remittances, dwindling forex reserves and widening balance of payment deficit are impossible to be reversed overnight.
Stagflation is often a rare but ominous phenomenon that simultaneously stagnates the economy's growth, but inflation keeps increasing while the economic recovery looks elusive. According to the data on the country's macroeconomic situation released last week by Nepal Rastra Bank, the central monetary authority of Nepal, the consumer price inflation (CPI) during the first five months of the current fiscal year stood at 7.11 percent. Compared to 2.93 percent last year, exceeding the target of containing it at 6.5 percent as set by the Bank's monetary policy for the current fiscal year. But the inflation has spiralled upwards, with the entire banking industry suffocating with a severe crunch of loanable funds in the market, commonly termed as a 'liquidity crisis.
Nepal's inflation rate is higher by 1.5 percentage points than CPI inflation in India which stood at 5.59 percent in December 2021. This certainly is an additional cause of concern given the strict pegging of exchange rates between Nepali and Indian currencies. This extra 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 an economic growth rate of 7 percent is still 'easily achievable'. But according to the World Bank's estimates, Nepal's economy grew only at 1.8 percent in 2021 and is projected to rise to 3.9 percent in the current fiscal year. It 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 bullish growth expectations of the Indian and Chinese economies.
The main concern for Nepal's economy is that the current phenomena of stagflation, low growth and high inflation seem to persist as the possible avenues of recovery appear hazy. Except for a bit of optimism to ease the liquidity crunch due to a likely increase in the government's capital expenditure which is meagre at 13.5 percent of the allocation in completion of the first half of the fiscal year. However, on the other hand, the trade deficit has crossed Rs900 billion, or 25 percent of the national economy. The trade deficit trend has now become chronic and the most significant risk to economic stability. The decreasing inflow of the workers' remittances, rapidly dwindling foreign currency reserves and widening balance of payment deficit thereof, which has already crossed the Rs200 billion mark, are impossible to be reversed overnight.
Other economic indicators critical for spurring growth, too, are becoming hopelessly pessimistic. Private investment has not markedly increased, foreign direct investment inflow is pathetic, and financial assistance from development partners remains even below the normal average. The performance of Nepal's key growth driver, the agricultural sector, paddy production, in particular, is set to be suboptimal due to the massive destruction of the near-to-ready harvest crop by unseasonal rains. And to add insult to injury, the onset of the third wave of Covid-19 infection has already shown signs of disruptions in economic activities. Loss in employment and productivity will first hit hard, again.
Solutions to most old and some new problems do not look forthcoming. Because, first and foremost, the political leadership is refusing to accept the harsh reality that the economy is in a rapid downward spiral. Mainly because the prime minister and finance minister do not appear bothered about the situation, Prime Minister Sher Bahadur Deuba's lack of interest in appointing the minister for commerce, supplies, and industry without any apparent reason is one clear indication of such indifference. Secondly, in its very nature, the scattered patchwork of the bureaucracy is more reactive to deflect the public criticism than focused on solving the problem, let alone reversing the pattern of bleeding the national exchequer. Thirdly, both the fiscal and monetary authorities of the nation have failed to recognise the need of separately clubbing the economic problems that may be addressed in the short run and those that require a long-run vision to solve them.
The government has even failed to undertake some critical initiatives at its apparent disposal that could help ease the situation. For example, a rapid review of the projects, particularly of large budget allocations like the projects of so-called national pride, to identify their bottlenecks on spending could increase the capital expenditure. Also, the government must now seriously rethink its thus far careless approach in mobilising economic diplomacy in the nation's interest.
A functional level of coordination between the federal Ministry of Finance with the related provincial ministries in the true spirit of federalism could speed up the bidding process for many medium-sized regional projects. Despite apparently deepening worries about the economy, the current dispensation has not even deemed it necessary to call the meeting of the Intergovernmental Fiscal Council. Headed by the finance minister with the provincial finance ministers as ex-officio members, as provided by Section 33 of the Intergovernmental Fiscal Arrangement Act, 2017. The Council is actually meant for a situation like the one prevalent at present 'to hold and maintain necessary consultation and coordination between the Government of Nepal, the State and Local Level on intergovernmental fiscal arrangements.' Similarly, the Inter-State Council headed by the prime minister under Article 234 of the constitution could have also taken up the matter had he been genuinely concerned about the impending perils.