Nepal is staring at stagflation, a scenario where an economy faces high inflation, low growth and high unemployment—all at the same time, economists said on Monday.

Nepal’s efforts to stamp out a surge in inflation have slowed the economic growth rate sharply.

At the start of the current fiscal year, the government had pompously declared that the economy would grow by an astounding 8 percent during the year. But reality set in soon enough. As the economy floundered, the gross domestic product (GDP) growth rate projection was halved to 4 percent during the mid-term review of the budget.

Then in April, the National Statistics Office said the economy would not grow by more than 1.86 percent, the lowest growth rate since the fiscal year 2015-2016. That year, Nepal was hit by earthquakes. There was an economic contraction in 2019-2020 too, caused by the Covid pandemic.

Nepal plunged into its first recession in six decades during the first two quarters of this fiscal year as economic output continued to be weighed down by inflation and political instability.

Officials at the National Statistics Office said that Nepal had narrowly avoided a technical recession in the third quarter.

“Inflation will keep on rising and we could face even higher inflation in coming years,” said Biswash Gauchan, executive director of the Institute for Integrated Development Studies.

“The burden of stagflation will make the poor suffer as a significant portion of their income is spent on food,” said Gauchan. He was speaking at the unveiling of Global Food Policy Report, 2023 in Kathmandu on Monday.

The report urged Nepal and other South Asian nations to focus on their food prices system, else high prices could make lives of everyone hard.

According to the report, the recovery and development of food systems in South Asia face multiple challenges.

Although the spillover effects from the Russia-Ukraine war have not been large, South Asia has been affected by the global rise in food, fuel, and fertiliser prices. Food prices in the region have risen sharply, contributing to food insecurity.

Gauchan said that the Covid pandemic included geopolitical shocks and supply disruptions, which have had a devastating impact on Nepal’s economy.

“Adding to the challenge, Nepal is experiencing a uniquely high price level, probably the highest in the region, making our products less competitive,” said Gauchan.

Land prices in Nepal are among the highest in the world.

Economists say that land for Nepalis has become a high-value asset instead of a mode of production.

For example, if a farmer sells his land and puts the proceeds of sale in a bank, he makes a handsome monthly earning from its high interest rate. But, if he uses it as a mode of production, he makes a meagre income from it.

Climate change is adding to the woes with farmers facing huge losses annually.

In October 2021, the Ministry of Agriculture and Livestock Development estimated that the unseasonal rainfall in the autumn had caused a loss of nearly Rs10 billion in the agricultural sector, including livestock.

“Climate change is one of the major reasons for the disaster being confronted by Nepal. It has exaggerated the threats to our food system,” said Narayan Kaji Shrestha, deputy prime minister and home minister.

“Nepal’s rising food crisis not only highlights the economic and social disparity, there is also a change in the behaviour patterns such as shifting to cheaper and less nutritious foods,” said Shrestha.

Food insecurity in Nepal has increased in recent years as Nepal is becoming more dependent on imported food, he added

Nepal’s ever-swelling agricultural imports hit the Rs400 billion mark in the last fiscal year ended July 16, 2022, prompting experts to warn that a farming country becoming so dependent on imported food indicates a full-blown emergency.

Taxes, particularly VAT imposed by the government, are a new threat to consumers hit by high inflation.

Shahidur Rashid, director of the South Asia Region at the International Food Policy Research Institute, said the geopolitical tension in one region impacts the other region.

For instance, according to him, the Russian invasion of Ukraine has had far-reaching consequences. It has made everything more expensive. “Nepali farmers had to suffer due to a sharp rise in the fertiliser prices.”

Natural disasters have increased over the last two decades in South Asia. “This adds more threats to food security,” said Rashid.

The frequency of extreme weather events like floods, cyclones, heatwaves and earthquakes has gone up, leading to internal displacement and forced migrations.

Building a sustainable food system in South Asia is, perhaps, the most important thing to do in the world, Rashid said.

Nepal’s agricultural sector has been underperforming over the decades.

The sector growth, which was 5.2 percent in 2019, declined to 2.4 percent in 2020. The growth in 2021 was 2.8 percent, which reached 4.2 percent in 2022.

The report said that South Asia is far off the track to achieve Sustainable Development Goal 2, which is Zero Hunger, by 2030.

“It’s because the governments of South Asia failed to tackle the problem in the agriculture sector,” the report said. “The number of undernourished people and those facing severe food insecurity have increased substantially over the past five years.”

Nepal’s prevalence of undernourishment, which was below 5 percent in 2017, increased in 2021. The country’s prevalence of severe food insecurity, which was slightly more than 10 percent in 2017, has increased to nearly 15 percent.

The frequency of natural disasters has also been increasing in Nepal in the last two decades. Floods are among the most lethal natural disasters in South Asian countries, followed by storms, droughts, earthquakes, landslides, epidemics and extreme temperatures.

“Political instability and violence are also key components that have been threatening food security in the South Asian region,” the report said.

The report recommended short- and long-term measures to tackle the food system crisis in South Asia, which include identifying the vulnerable households and groups—women, children, the elderly, and disabled persons—and providing them adequate support.

It recommended the promotion of intraregional trade, including the removal of recently adopted protectionist policies and increasing production by improving smallholders' access to modern technologies and inputs.

Investments in customised climate-smart agriculture systems need to be increased in order to avoid a full-blown emergency in the coming years, the report suggested.