| March 26, 2017

Priced out

Post-budget inflation

In a mature economy the monetary policy of the central bank plays a big role in determining the level of inflation. If there is excess supply of money in the market and the price of goods and services rises, the bank pulls the money back to check inflation. If the money is in shortage, the central bank injects liquidity into the market to prevent deflation. But in an underdeveloped country like Nepal, where, according to the World Bank, the informal economy is around 40 percent of GDP, the monetary policies have limited impact on market prices. This is why the inflation-stoking recent government budget is so worrisome. Traditionally, both wholesalers and retailers in Nepal have made the salary of government employees the benchmark to set the price of their goods and services. This year, the salary of government employees was raised by 25 percent; the increase comes to a whopping 40 percent if we add new perks they will now be entitled to. On cue, the prices of daily commodities have also rocketed. Pluses are now Rs 30-50 more expensive per kg than before the budget speech. Likewise, sugar, which cost Rs 70 per kg before the budget now costs Rs 80 per kg.

These are the commodities people from all economic backgrounds have to consume. Even if they skimp on spending on luxury goods, there is no getting around paying the inflated costs for food products. The poor families also spend a disproportionate amount of their income on food. A person earning Rs 25,000 a month in Nepal spends nearly half his income on food; someone earning Rs 50,000 spends only around 15-20 percent on food items. This is why the increase in the price of daily edibles hits those in the lowest income brackets, or daily wage earners, the hardest. But it also affects a significant section of the population. According to Nepal Rastra Bank, the daily income of an average Nepali is around Rs 204 of which he spends Rs 176. This comes to a daily saving of Rs 28. With the recent increase in the price of edibles, there is unlikely to be any saving for non-government employees, or over 90 percent of all working-age Nepalis. So what then is the solution?

There is currently next to no monitoring of Nepali markets. Industries and businesses are thus free to fix the prices of their products as they please. This wouldn’t matter in a well-functioning free-market economy where producers compete on price. The problem with Nepal is that even though the country embraced wholesale market liberalization starting with the 1990s, it failed to simultaneously develop institutions that would ensure fair competition. In their absence, cartels and syndicates have sprouted in nearly all industries. Black-marketing continues to thrive, often with active collusion of top government officials. Unless we have strong oversight mechanisms, the lower and the middle classes will continue to be at the mercy of unscrupulous businessmen and bureaucrats. There must also be greater initiative to take on black-marketing and to expand the formal economy, which will also boost tax revenues. The government’s new populist economic policies have something for everyone. But more than the government gives in subsidies and salary increases it takes from common Nepalis in the form of increased market prices. The focus thus has to be correcting flawed market mechanisms, not offering people diabetic lollipops.

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