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February 1 Anniversary
In a rare coincidence, February 1 this year fell on the Magh 19th of the Nepali calendar as it did last year. The date will be remembered in the annals of Nepali history in the same manner as does Poush 1st 1961. On both these days, the King dismissed the popularly elected government and assumed all state powers.
But while it took almost three decades from 1961 for the people to get power back from the King, this time things are moving pretty fast, it seems.
However, it is not only the political movement that is going against the King. The economic forces seem working more fiercely.
While the energy crisis is making a big dent on the state coffers with a lot of money flowing to sustain the state-owned bankrupt monopoly on petroleum fuel import Nepal Oil Corporation, the fear of a double digit inflation is almost a reality. Announcing the macroeconomic data for the first four months of the current fiscal year that started mid-July, Nepal Rastra Bank revealed that the inflation rate in mid-October was 8.5 per cent as compared to the same month during the previous year. Though the average of the inflation for the 12 months up to mid-October was 6.3 per cent only, it is expected to increase further during the coming months as the recent upsurge in the price level is caused by, among others, the reduction in the production of staple rice which accounts for some 14 per cent weight in the basket of commodities included in the list for preparing the consumer price index.
Though Nepal Rastra Bank has predicted that the rate of inflation will be contained at 7 per cent by the end of the current fiscal year, the compulsion to increase petroleum fuel prices in view of the persistent upward trend in the crude oil price in the international market will surely drive the inflation rate upward. According to the provisions of the revised budget ordinance issued in mid-January, the retail prices of petrol, aviation fuel and kerosene are to increase in the near future while that of diesel has been reduced. Since this revision is to increase the losses of Nepal Oil Corporation, the dent on the government treasury will further magnify.
The rising inflation is accompanied by a growing fiscal deficit caused, in turn, by the growing security expenditure and reduction in foreign aid. Failure to contain inflation has been the major cause of government failure in many countries leading to social unrest and anarchy. Taking this in view, it is to be seen how the government's efforts to increase revenue collection by strengthening VAT will be successful. For this, the government has substantially reduced tariff on imports of various items. If this effort fails to encourage traders to channel their imports through customs and declare their true values, the government is going to suffer further revenue crunch.
The authorities in Nepal Rastra Bank, the principal economic advisor of the government, too seem doubtful of the government efforts. They were advising the government to take some fiscal measures to control inflation. And after the revised budget was announced, Nepal Rastra Bank came up with the figure for "core inflation", which helps to measure the effectiveness of the monetary policy to contain inflation. As the figure shows, the core inflation is well below the targeted 5 per cent, thus proving that Nepal Rastra Bank is doing its job. The conclusion is that the ongoing inflation is entirely due to the failure of the government to do its job.
Meanwhile, the energy crisis has hit the economy from another side too. Nepal Electricity Authority, another loss-making, state-controlled monopoly, has affected 17-hours a week load-shedding disrupting all manufacturing and service sector activities. Thus the economy is fast moving towards a stage of "stagflation", a rare situation of stagnation accompanied by inflation.
A very ripe situation for social unrest!
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