Inflation in Nepal: Recent Development & Outlook

Chandan Sapkota

22-44 January, 2014

2013-01-22

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Presentation Outline Inflation in Nepal Recent Development

Causes of Inflation
Policy Implications Inflation Outlook
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Inflation in Nepal
20 15

10

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

-5 Overall inflation Food & bevereges inflation Non food & services inflation

Overall inflation hovering around 10% Food inflation high since FY2006 Non-food inflation also increasing (depreciation of rupee)
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Recent Development
14 12 10 8 6 4 2 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 14 12 10 8

Overall inflation

16 14 12 10 8 6 4 2

Food inflation

0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY2012 FY2013 FY2014 Jul

Non-food inflation

FY2012

FY2013

FY2014

Overall inflation creeping up Food inflation rising fast Non-food inflation moderating

4
2 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY2012 FY2013 FY2014 Jul

2013-01-22

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Causes of Inflation
Pegged Nepali rupee to Indian rupee
Effectiveness of monetary tools to tame rising prices? M2 growth and inflation weakly correlated
Short-run impact on certain sectors

Broadly inflation is determined by:

Price level in India Agriculture harvest Cost escalation due to weak currency
Cost of imported raw materials/intermediate goods up Cost of final goods up

Adjustment of administered fuel prices Adjustment of public and private sector wages Supply-side constraints
Severity of power outages Transport bottlenecks Market distortions (middlemen, syndicates, cartels)

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Overall inflation after FY2008

25 20 15 10 5 0

NEP-CPI

IND-WPI

Inflation in Nepal generally moves in tandem with inflation in India

But, usually a bit higher than in India Prices price through in about 7 months (earlier) vs. about 3 months (now) Even when inflation fell in India, it increased in Nepal. FY2008 saw rapidly rising global food, fuel and commodity prices Higher prices passed through imports Embedded expectations/Sticky prices?

After FY2008, there is a deviation

Inflation in India and international oil price movements account for one-third of the variability in Nepals inflation (IMF 2011)
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Food and Non-food Inflation

Food price inflation
Quick to spillovers from Indias food inflation and oil price movements Impact of oil price movements more persistent
Chemicals and fertilizers, transportation costs of agri products, fuel use in irrigation

Non-food price inflation

Responsiveness quick to international oil price movements Changes in NEER affects quickly Monetary responsiveness fades out quickly Non-monetary factors playing an increasingly important role

Effect of changes in NEER: Lag of about three months Monetary responsiveness temporary and fades out quickly

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Policy Implications
Addressing non-monetary factors/Supply-side constraints
Fiscal policy: Prudent public expenditure Boosting agriculture production/productivity
Food price inflation is more volatile than non-food price inflation

Addressing inflationary expectations Supply-side constraints:

Power outages (long term solution) Addressing market distortions (middlemen, syndicates, cartels) Controlling anti-competitive practices
Effective market supervision and monitoring

2013-01-22

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Inflation Outlook
Forecast for FY2014: ??%
Wage pressures
Public and private sector wages up
11 10 9.9

9.6
10

9.6

Continued high price level in India Rise in administered fuel prices

Revised upward thrice already

Continued depreciation of Nepali rupee Persistent supply-side constraints (Good agriculture harvest will help lower pressures)
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8.3

7 FY2010 FY2011 FY2012 FY2013

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