Stronger dollar coupled with food price hike fuelled by rising international fuel prices is going to drag down more populace below the poverty line.
According to International Monetary Fund (IMF), external spillovers from India, international oil prices — due to diversified consumption pattern alongside rising per capital income and increasing economic openness — nominal effective exchange rate, and domestic monetary factors are key to inflation in Nepal.
The government is planning to hike the fuel prices, which according to IMF's inflation dynamics of Nepal, is the key reason for food price hike.
"Nepal’s inflation should move closely with that of India," it said, adding that it was generally true up until 2007-08, but since then Nepal’s inflation —food and nonfood — has been consistently higher. "The cumulative difference of Nepal’s price indices from those of India, which rose dramatically from 2007-08 has more than quadrupled that of nonfood by early 2011.
The responsiveness to international oil prices and the exchange rate has increased in recent years, it said, adding that there is no evidence of monetary policy tools being actively used to manage inflation that is going to contribute in increasing poverty.
According to recent report of Asian Development Bank (ADB), a 20 per cent food price inflation would cause the poverty ratio to rise by over four percentage points, increasing the poor population by more than one million.
According to Central Statistic Bureau (CBS), a quarter of the total 26.62 million population is under the new poverty line meaning they earn less than Rs 54 per day on the basis of consumption.
The rising inflation will pull one million more down to 7.7 million population under the poverty line from the current around 6.7 million poor in the country thanks to the current trend of rising food prices that is above the average of developing Asia.
Both India’s inflation and international oil prices have strong spillovers — one third of the impact — to Nepal. But imported inflation has a quick spillover effect, while the impact of international oil prices is slower but more persistent.
The inflation rate has stood at around two-digit levels for three consecutive years, averaging 10.5 per cent in the last three years and reaching about 10 per cent by mid-2011 mainly driven by food price inflation. In the past three years, Nepal’s food inflation averaged 15.5 per cent, compared to 6.5 per cent of the nonfood. Food price increases have cumulatively contributed to about 0.75 per cent of overall CPI inflation, while nonfood contributed the remaining 0.25 per cent, it added.
The food price inflation has been much higher than nonfood inflation due to the correlation between oil price and those of chemicals and fertilizers used in agricultural production, transportation cost of agricultural products and use of energy in irrigation.
The IMF also said that management of inflation in Nepal will continue to be challenging. The central bank and the market monitoring agencies need more active policy actions to manage inflation.
The report has also warned that the changing pattern of inflation may reflect structural changes in economy including rising imports as a share of GDP, and alerted policy makers to be alert to the changes as they may cause inflation to be more volatile and persistent.
Despite strong spillover from outside, domestic monetary conditions matter for inflation, but the central bank failed to use monetary policy tools effectively to curb inflationary pressures. But the central bank has been blaming the rising informal economy — that is as big as the formal economy — in effective use of the monetary tools to crack whip on price hike.