Inflation worries reflected in Economic Survey

Kathmandu,July-13 At a time when the government is facing a big challenge to maintain price stability, it is staring at the possibility of inflation rising up further in the coming fiscal year 2015/16.

The average inflation of last five years stands at 9.3 percent.

The government's concern is manifested in the 'Economic Survey 2014/15' which was unveiled by Minister of Finance Ram Sharan Mahat on Sunday.

The survey has attributed surge in net foreign asset of banking sector due to rise in foreign assistance for reconstruction in the aftermath of the earthquake to possible increment in inflation in the days to come. Inflation, however, has remained below the government target in this fiscal year so far.

According to the Economic Survey, inflation stood at 7.2 percent in the eight months of the current fiscal year 2014/15 against the target of 8 percent for the year.

Economists say that the flow of money that goes into the hands of the public leads to the rise in demand for food or service sector which leads to the price rise. This phenomenon is called demand pull inflation.

Earlier on June 25, donor countries and organizations pledged Rs 440 billion for reconstruction works. Part of the fund committed in the conference is likely to trickle into the government treasury or the banking system in the coming fiscal year. This is likely to drive up inflation as the demand will go up due to expenditure of this fund once reconstruction works kick up, according to the survey.

Likewise, the supply side factor also plays vital role in inflation.

The survey has also pointed out increase in the price of food stuffs due to drop in agro production and rise in the price of noon-food items and service sector because to disturbance in supply system, among others, as the factors that will push inflation up in the coming days.

If there is supply constraint in food and service sector, their prices will also up. The government has made downward revision of agro production growth to 1.9 percent from 2.9 percent, citing unfavorable monsoon. This is likely to drive up food price. "It will be challenging to contain inflation within appropriate level in the coming days," reads the Economic Survey. "Thus it is imperative that we coordinate between fiscal and monetary policy to manage the demand side by strengthening the supply side and remove structural barriers for maintaining price stability," it added.

Source: Republica