Keeping inflation at 7.5 pc tough: NRB

Keeping inflation at 7.5 pc tough: NRB

Officials of Nepal Rastra Bank, the central monetary authority, are scratching their heads, as they are trying to find out ways to offset the impact of distributive budget on consumer prices.

On May 28, Finance Minister Bishnu Prasad Paudel introduced a budget of Rs 1,048.9 billion for the next fiscal year up 28 per cent from the the current fiscal year.

Despite the launch of such a big spending plan, of which 59 per cent has been allocated for recurrent expenditure, the budget document has fixed inflation target for the next fiscal at 7.5 per cent.

This means NRB, which must ensure price stability, should not allow prices of consumer goods and services to rise beyond 7.5 per cent in the next financial year.

“Maintaining inflation at that level in the next fiscal will be a tough job. But we will abide by the instruction and do all we can to attain that target,” NRB Deputy Governor Chinta Mani Siwakoti told The Himalayan Times.

The inflation target announced by the finance minister was incorporated in the budget document based on NRB’s recommendation. But NRB had fixed that target on the basis of next fiscal’s budget ceiling of around Rs 908 billion initially extended by the National Planning Commission to the Ministry of Finance, according to Siwakoti.

Later, the finance ministry decided to exceed the budget ceiling by 15.5 per cent, but kept the inflation target unchanged at 7.5 per cent.

Now, as NRB is all set to frame the Monetary Policy for the next fiscal year, it has found itself in a tight spot because it does not want to annoy the government by revising the inflation target; but if it does not do so it runs the risk of setting an unrealistic target, which will have to be revised during the mid-term review of the Monetary Policy.

Generally, when the government comes up with expansionary fiscal policy (budget), NRB tries to introduce a contractionary monetary policy in order to control money supply and tame inflation. But the fiscal policy of next fiscal year has targeted economic growth rate of 6.5 per cent, as against this fiscal’s 0.8 per cent.

So, NRB does not have the luxury of introducing a very contractionary monetary policy, as it would limit money supply and stifle growth.

“In this regard, we are thinking of setting broad money supply growth target of around 22 per cent for the next fiscal, (as against the revised growth estimate of 21.5 per cent for the current financial year),” Siwakoti said.

Although the money supply growth estimate, as per Siwakoti, ‘is preliminary and can be revised at a later date’, the proposed target is four percentage points higher than at the time when NRB had fixed inflation target of 7.5 per cent based on NPC’s budget ceiling.

So the revision in money supply growth target indicates additional inflationary pressure will most likely be created in the next fiscal.

On top of that, derived inflation from India and supply-side constraints, as always, will continue to put upward pressure on prices.

Source: THT