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R&D Inflation Report Analysts -----------------------------------Shivanth B. Pande’ Economist & Financial Analyst Research Head Shivanth@nibl.com.np Santosh Pokharel Economist & Financial Analyst Research Officer santoshpk@nibl.com.np Nischal Bajrachyara Research Fellow nischal@nibl.com.np

Summary: •

The Year-on-Year inflation rate as of midJanuary 2009, according to Nepal Rastra Bank‘s (NRB) latest macroeconomic report, is 14.4%.

Price index of food and beverage group up 18.3% while price index of non-food and service group up 10.3% as of Mid-January 2009.

Among the food and Beverage group, the subgroup of sugar and sugar related products witnessed highest price increment while among the non-food and Service group transport and communication sub-group saw highest price increment.

Geographically, the price increment was highest in Kathmandu compared to Terai and Hills.

Wholesale Price Index (WPI) based inflation in India as of Feb 28th 2009 is 2.43 %.

Kanchan Pandey Research Fellow kanchan@nibl.com.np Upasana Rana Research Fellow upasana@nibl.com.np Sharad Ghimire Research Fellow sharad@nibl.com.np Sweachha Mathema Research Intern researchintern@nibl.com.np

Inflation in Nepal Despite a decline in inflationary pressure worldwide, inflation in Nepal is still in double digits and doesn’t appear to be coming down. According to the latest macroeconomic report from Nepal Rastra Bank (NRB), the year-on-year (y-o-y) CPI rose to 14.4 % in mid Jan 2009 from 5.8 percent in the previous year. The latest figure suggests that the decline in inflation figure in mid December 2008 was just a temporary blip (See Figure 1). Given the past six month inflationary trend, it is very unlikely that the government will be able to meet the projected inflation target of 7.5 percent in 2008/09. The year-end annual report from the NRB shows that the average annual consumer inflation was 7.7 percent in 2007/2008.

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Figure 1: The Year-on Year (y-o-y) inflation figure (Source: NRB)

Rising inflation, according to the NRB report, has been driven primarily by significant rise in food and beverages (18.3 percent) as well as non food and services (10.3 percent) group. In the food and beverage group, the highest price increment was reported in the index of Sugar and Sugar related products while transport and communication index witnessed the highest surge in price in non-food and services group index. Moreover, in terms of geographic location, the largest price increment was seen in Kathmandu valley as of Mid January 2009 (See Figure 2 for details).

Product-wise break down of Inflation figure Food and Beverage Group Index Sugar and Sugar Related Products Pulses Oil and Ghee Grains and Cereal Products Meat, Fish and Eggs Restaurant Meal Non-Food and Services Group Index Transport and Communication Tobacco and Related Products Housing Goods and Services

18.3 37.3 25.6 25 16.5 22.5 21.5 10.3 20.7 15.1 11

Geographic breakdown of Inflation figure Kathmandu Valley Hills Terai Figure 2: Breakdown of Inflation Numbers (Source: NRB)

15.8 14.2 13.6

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Reasons for High Inflation There are various reasons for high level of inflation in Nepal. First and foremost, the frequent bandhs and law and order problems in Terai, where majority of Industries are located, have brought industrial production to a standstill. Moreover, the frequent highway blockade has prevented smooth transportation of goods resulting in scarcity of essential items in major parts of the country (See Box 1 for details). Likewise, the 16 hours of load shedding and the prevailing energy crisis has also undermined the production capacity of industries, mainly small and medium scale enterprises, resulting in inadequate production. On its part, the Ministry of Finance has attributed high prices to syndicate and cartel system employed by Nepali businessmen.

Box 1: Bandhs in Nepal: A WFP Report According to a recent World Food Program (WFP) report called Bandhs in Nepal, Terai is the most commonly impacted by the frequent bandhs and strikes and according to the WFP survey 93 percent of the food traders in Terai considered bandhs to be a major business problem. Also the WFP survey revealed that between July and December 2008, 14 percent of traders in Terai had to close their business because of bandhs. Other reported impacts of the bandhs are, according to the report, supply constraints, high transportation costs, limited market access for buyers, and general fear.

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Inflation in India While prices in Nepal have been skyrocketing, inflation in India has been easing recently. The Wholesale Price Index (WPI) based inflation rate has come down to 2.43 percent for the week ending on Feb 28th from 3.03 percent the week earlier. After reaching double digit numbers in mid-2008, the WPI based Indian inflation figures have been coming down drastically during last few months (See figure 3). Indian economists now expect the inflation rate in India to turn negative in two or three months.

Figure 3: WPI based Indian Inflation for 2009

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R & D - Inflation Report (JAN)