Report Number: R1

A REPORT

ON

PRICE HIKE IN NEPAL

SUBMITTED BY:

ABINASH DEV

SHIKHAR PANDIT

SONU KUMAR SINGH

UDAYA ADHIKARI

NEPAL RASTRA BANK

KATHMANDU

November 01, 2020

 Report Number: R1

A REPORT

ON

PRICE HIKE IN NEPAL

SUBMITTED TO:
RAJIV THAPA

FINANCIAL DIRECTOR

SUBMITTED BY:

ABINASH DEV

SHIKHAR PANDIT

SONU KUMAR SINGH

UDAYA ADHIKARI

INVESTMENT ACCOUNTING ANALYSTS

APPROVED BY:

SUSHIL KARKI

SENIOR INVESTMENT ANALYST

NEPAL RASTRA BANK

KATHMANDU

NOVEMBER 01, 2020

 PREFACE

Excess inflation detracts from sustainable economic growth and development. The
detrimental effect of high inflation comes largely through the channel of increased
uncertainty, which has been shown empirically in many studies. Because of this
effect, many monetary authorities have been given the responsibility of keeping
inflation at a level consistent with that needed for smooth growth of the economy.

Nepal is also aware of the importance of having price stability for attaining
sustained domestic economic growth. In this reference, the grave responsibility for
maintaining price stability has been conferred upon the Nepal Rastra Bank (NRB)
by the Nepal Rastra Bank Act, 2002.

For the Bank to adequately discharge this responsibility, it is important to identify

and determine the factors that influence inflation in the country, so that it can
adequately manage and control and also accurately forecast the domestic inflation
situation. To address the above-mentioned necessity, the Bank's Research
Department has undergone an intensive research activity in this regard. I feel that
the output of this important study entitled “Inflation in Nepal” well reflects the
awareness by the NRB of the critical responsibility for maintaining domestic price
stability, and is a seminal publication for understanding the dynamics of inflation
in the country.

Authors and Editors

Abinash Dev

Shikhar Pandit

Sonu Kumar Singh

Udaya Adhikari

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 ACKNOWLEDGEMENT

I would like to express my deepest appreciation to all those who provided me the
responsibility to complete the report. A special gratitude I give to Mr. Krishna
Bahadur Manandhar for chairing the interaction program, and Professor
Gunanidhi Sharma, and Dr. Shanker Sharma for critically reviewing the paper.

Furthermore I appreciate the guidance of Directors Mr. Trilochan Pangeni and

Mrs. Rameswori Pant, and comments from Director Mr. Nara Bahadur Thapa.
Likewise, Deputy Director Mr. Gopal Prasad Bhatta, and Assistant Directors; Mr.
Dilaram Subedi and Dr. Khemraj Bhetuwal, all from Price Division; and Deputy
Director Dr. Nephil Matangi Maskay, and Assistant Director Mr. Satyendra Raj
Subedi, both from the Economic Analysis Division deserve special mentioning for
their untiring and sincere efforts. My special thanks go to my team mates Udaya,
Abinash and Shikhar , who helped me ton assemble the parts and gave suggestion
about PRICE HIKE IN NEPAL . The hard work of Mr. Tek Maharjan in
formatting and processing, and of Mr.Sundar Shrestha for cover designing is
highly appreciated.

I thank the Bucharest University of economics studies for permission to include

copyrighted photographs as part of my study report.

I would like to express my sincere gratitude to the selection committee for

considering me the correct subject for granting fellowship.

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 TABLE OF CONTENTS

Preface (I)
Acknowledgement (II)
Abstract and Summary (IV)
1. Introduction 1
2. Discussion 4
2.1. Causes of Price Hike in Nepal 4
2.1.1. Demand Generated Inflation 4
2.1.2. Supply Generated Inflation 5
2.2. Effects of Price Hike 6
4. Conclusions 7
5. Recommendations 8
6. List of References 9
7. Glossary 10

LIST OF FIGURES AND TABLES

1. Inflation rate from 1084 to 2021 5

2. Bar graph of Inflation after 2019 6

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 ABSTRACT

The present study was undertaken to examine the impact of price hike on the
consumers' livelihood. Data obtained from NRB was used for our study to obtain
rate of price hike in daily goods and utilities. From our research we found that the
Price Hike rate was quite uneven and distorted, which is not considered to be a
good indication for economic growth and stability of a country. This report also
attempts to highlight everyday issues caused by Price Hike and enlists solutions
put forward by NRB to minimize Price Hike.

SUMMARY

Achieving a low and stable Price Hike is the prime goal of monetary policy put
forward by any country. Nepal is also aware of the importance of having price
stability for attaining sustained domestic economic growth. However, the
dynamics of price and inflation in Nepal is somewhat complex mainly because of
the large trade dependence with India, along with sharing the open border.
Empirical results suggest that inflation in Nepal is mainly determined by Indian
inflation. The study had therefore concluded that within the existing framework of
pegged exchange rate and capital mobility, the main influencing factor in Price
Hike is from India with the NRB having control over domestic inflation only in
the short run (a one year window) but limited control beyond that. Also the level
of financial development is still at the nascent stage in Nepal. In this context, the
present study attempts to delineate the possible factors determining inflation in
Nepal.

IV
 INTRODUCTION

Inflation can be defined as the persistent rise in the general price level across the
economy over time. Mild inflation is considered to be desirable for economic
growth. However, high and variable inflation, in general, leads to uncertainties in
income and expenditure decisions of the different groups of the society; distorts
economic growth; lowers savings and investments; and makes more expensive
cost of capital. High inflation is more likely to raise unemployment than to lower
it (Friedman, 1977). More specifically, it hurts the poorest of the poor having
fixed level of income, as inflation erodes their real wealth. In other words, it
further widens the income inequality in society.

High inflation complicates long-term economic planning, creating incentives for

households and firms to shorten their horizons and to spend resources in
managing inflation risk rather than focusing on the most productive activities
(Bernanke, 2006). On the other hand, "Low and stable inflation brings stability to
financial systems and fosters sustainable economic growth over the longer run"
(Fergusson, 2005). Private entrepreneurs react to high levels of inflation by
lowering their investment, which eventually leads to a retardation of the country's
economic growth. Contrary to this, price stability preserves the integrity and
purchasing power of currency. When prices are stable, both economic growth and
stability are likely to be achieved, and long-term interest rates are likely to be
moderate. It further promotes efficiency of market participants. Long-term growth
in the economy is possible by providing a monetary and financial environment in
which economic decisions can be made and markets can operate without concern
about unpredictable fluctuations in the purchasing power of money. Thus, the
primary role of monetary policy should be to maintain price stability (Batini and
Yates 2003, Pianalto 2005).

Experiences of industrialized countries show that low and stable inflation is not
only beneficial for growth and employment in the long-term but also contributes
to greater stability of output and employment in the short to medium term. When
inflation is well-controlled, the public expectations of inflation will also be low

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and stable. In a vicious circle, stable inflation expectations help the central bank to
keep inflation low. On the other hand instability in inflation and its expectations
jeopardize the orderly functioning of financial and commodity markets as well.

Price hike also takes place when different economic and political situations occur
inside the country resulting in inflation. Rapid population growth, income
increase, insufficient agricultural output and insufficient industrial production are
some of the major factors which plays great role in the price hike locally.

To spur economic growth in Nepal and uplift the status of the people, it is
essential to provide a stable financial environment by controlling inflation. The
Nepal Rastra Bank Act, 2002, has conferred the grave responsibility of
maintaining price stability on the Nepal Rastra Bank. The different objectives of
Nepal Rastra Bank, as put in NRB Act, 2002, are provided as:

o To formulate necessary monetary and foreign exchange policies in order to

maintain the stability of price and balance of payment for sustainable
development of economy;
o To promote stability and liquidity required in banking and financial sector;
o To develop a secure, healthy and efficient system of payment;
o To regulate, inspect, supervise and monitor the banking and financial
system
o To promote entire banking and financial system of Nepal and to enhance
its public credibility.

Understanding the process of inflation is important to predict the future path of

inflation successfully and adopt appropriate policy measure. It is, therefore,
crucial to identify the factors influencing inflation in Nepal in order to facilitate
the maintenance of price stability and ensure macroeconomic stability. A large
number of studies in Nepal have been conducted to identify the factors responsible
for inflation based on the different theories of inflation.

The basic objective of the study is to identify the factors influencing inflation in
Nepal. It includes the following specific objectives:

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 o To review major models of inflation and identify the appropriate model for
Nepal;
o To identify the short-term and long term relationship of inflation with the
factors after their identifications
o To analyze the impact of determining variables in inflation

Regarding the methodology of the study, the general model of inflation for Nepal
will be developed first after i) examining the historical pattern of inflation in
Nepal, ii) viewing different theories of inflation, and iii) reviewing the previous
studies at national and international level, specially considering to the
methodological aspects and different tools. Different variables will be identified to
incorporate into the general model.

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 DISSCUSSION

2.1 Causes of Price Hiking

The price hiking or inflation is seemed a phenomenon ushered in the economy due
to demand-generated and supply-generated effect. If an increase in effective
demand is unmatched by total supply available at the current price, it will exert its'
influence in raising prices which is termed as demand-pull inflation. From the
angle of production process, if rise in price is initiated by the increase in factor
cost, then it is cost-push inflation. We can broadly categorize the effect that
usually gives rise to inflation into two aspects, i. e. the demand side and supply
side of economy.

2.1.1 Demand generated Inflation

We consider on those factors that lead to increase demand pushing-up price and
thus exerting inflation in the economy. Deficit budget is a major factor, which is
aiming at spending more than the government's revenue. The government tries to
meet its deficit budget through borrowings from domestic and external sources.
Domestic borrowings include borrowings from the public and banking sector,
particularly overdraft from central bank. An excessive overdraft facility enjoyed
from the central bank increases supply of money, which ultimately leads to raise
in general price level. As such other borrowings are collected and government
starts to invest on social overheads, it takes long time to outcome returns from
such sectors on one hand and puts immediate pressure to push-up effective
demand of economy on the other. Thus, increase in money supply and pressure on
demand results in widening equilibrium forces of economy causing increase in
price of goods. High volumes of credit flow to private sector will also increases
the flow of money in the economy. Increase in income level of people leads to
increase in demand. As a result, the existing capacity and services may not be
adequate to satisfy the demand and prices have a tendency to rise following excess
demand. Shortages of goods due to natural calamities like flood, erosion,

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earthquakes etc. leads in scant supply of goods and forces to rise in price
ultimately as to discourse demand. Increase in prices of import-based
commodities in international market, low productivity on the ground of high
population growth rate etc. are other factors in putting pressure on demand and
weakening supply capacity. Thus, there will be gaping and fall in supply strength
to meet such excess demand.

2.1.2 Supply Generated Inflation

Supply generated inflation mainly occurs due to increase in cost of production. A

number of factors are responsible to increase the cost of production pushing-up
prices and finally making rise in the general price level. Cost of production goes
up when the prices of raw materials and wages increase, imposition of taxes,
increase in custom duties, devaluation of domestic currency, depletion of natural
resources, growing cost of factor of productions and increase in profit margin for
the companies . Due to increase in cost of production, it increases the price of
goods on one hand and need to curtail the size of output at the given level of
investment on the other.

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The other major causes of price hiking are the domestic or internal causes like
Rapid population growth, Black marketing, Formation of syndicates, Corruption,
Bribery and illegal tool collection etc.

2.2 Effects of Price hike:

Mainly the price hikes or inflation can be categories in to these groups: creeping
(increase up to 3%), walking (3-6%), Running (6-10%), hyper(>10%). For
developing countries like Nepal walking or running inflation can be considered
good. As for developed countries creeping inflation is considered ideal. As for
developing countries rising price level stimulates production, increases
employment, facilitates a faster rate of capital formation, creates demands for
more production and thus benefits the nation as a whole. But over hiking rather
deteriorates the overall situation of the country’s economy as well as the people’s
standard of living. People, having increase in money income with higher rate in
comparison to rise in price and other small portions of entrepreneur and
businessman usually get benefit with more and more earnings. But people with
lower income level are adversely stroke by the inflation, which tends to alter the
existing distribution of wealth and income and it further intensifies and widens the
gap among people in the society. The past inflation rates of Nepal is presented
below:

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 CONCLUSIONS

The governmental and non-governmental organizations like Nepal Rastra Bank

are aware of price hikes in Nepal, and are conscious of their duty of controlling it.

However, the measures it has taken have not been able to control it to the desired
extent. Recently the inflation rate is about 8% pa. Problems such as excessive
black marketing, blurry conduction of rules, as well as the lack of national export
of goods compared to import has become the major obstacle. The industrial sector
has fared better at the hands of the government. However, industrial growth rate
has only increased in the last 30 or so years. Therefore, certain industrial products
such as basic consumer products and agricultural and industrial inputs have not
been able to keep up with the demand. The lack of capable manpower and the
proper way of transporting and delivering raw materials which finally results for
greater price of products seems to be another major problem. Also the excessive
dependency in our neighbor India with its ambiguous relation seems to be the
problem to be sorted. The political instability and frequent strikes and bandas are
another reason contributing the price hikes in recent context. Corruption on the
other hand due to political influence and excessive deposition of black currency
by so called political leaders and big businessmen seems to be another major
cause for the price hikes in Nepal which needs to be sorted out. Another reason
for local and domestic price hikes seems to be the syndicate groups which control
the market behind the scenes. Again lack of communication and co-ordination in
between different Government officers and lack of communication system in
between different sub districts and districts headquarters with the capital is also
seems to be responsible for this recent price hike. Also the excessive dependency
in our neighbor India with its ambiguous relation seems to be the problem to be
sorted.

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 RECOMMENDATIONS

The following recommendation may be taken for managing and controlling the
price inflation/hike in Nepal:

1. Over dependency in import from one country should be minimized and

bigger platform should be made by cooperation with other countries like
China.
2. In order to control inflation, different economic policies such as fiscal
policy and monetary policy should be applied to keep the rate under check.
3. Strong laws should be applied to control the black marketing as well as to
keep check the local and governmental authorities.
4. Strong emphasis should be made by government in agricultural section for
increasing the amount of raw materials in industries and finally the export
and decreasing the demand.
5. Syndicates and middle man system should be abolished and government
bodies should emphasis on the direct delivery of product from farmers to
consumers.
6. Better political stability should be maintained and so called strikes and
bandas should be stopped declaring highway a strike free zone.
7. Industrial area should be given more priority for flourishing and more tax
benefit should be awarded to business investors.
8. Different programs should be made for production and stop drain of
skilled man power with in the country.
9. If business ethics is responsible for super-pricing of product, more ethical
curriculum needed to be included in the academic syllabus, and laws
regarding ethical aspects should be introduced.
10. Bold measures like changing the currency done by India should be applied
for abolishment of all black currency in the country.

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 LIST OF REFERENCES

 https://www.yourarticlelibrary.com/macro-economics/inflation-macro-
economics/controlling-inflation-3-important-measures-to-control-
inflation/31093
 Chan, S., 2013. Inflation: Five Graphs That Show Why Prices Are Rising-
<http://www.telegraph.co.uk/finance/economics/10127214/UK-inflation-
five-graphs-that-show-why-prices-are-rising.html>.
 https://www.economicsdiscussion.net/price/price-control/price-control-
and-rationing-commodities-economics/25733
 https://www.indiacelebrating.com/essay/essay-on-rising-prices-price-hike/
 https://www.yourarticlelibrary.com/macro-economics/inflation-macro-
economics/controlling-inflation-3-important-measures-to-control-
inflation/31093
 https://www.economicsdiscussion.net/inflation/measures-for-controlling-
inflation-with-diagram/4075
 https://www.researchgate.net/publication/
322116460_ANALYSIS_OF_INFLATION_OF_NEPAL
 https://www.slideshare.net/pawankawan/inflation-23914386
 https://hregmi.blogspot.com/2014/03/inflation-causes-effects-
consequences.html
 https://www.financialexpress.com/what-is/inflation-meaning/1618981/

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 GLOSSARY

 Consumer Price Index (CPI):

A measure that examines the weighted average of prices of a basket of
consumer goods and services, such as transportation, food and medical
care.
 Wholesale Price Index (WPI):
A stock index in which each stock influences the index in proportion to its
price per share.
 Growth Rate:
The amount of increase that a specific variable has gained within a specific
period and context.
 Creeping Inflation:
When prices rise by not more than 3% per annum, it is called Creeping
Inflation.
 Chronic Inflation:
If creeping inflation persist for a longer period of time, then it is called as
Chronic Inflation.
 Walking Inflation:
When prices rise by more than 3% but less than 6% per annum it is called
as Walking Inflation.
 Moderate Inflation:

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 When prices rise by less than 6% per annum, it is known as Moderate
Inflation.
 Running Inflation:
When prices rise by more than 6% and less than 10% per annum, it is
known as Running Inflation.
 Hyperinflation:
When prices rise above 50% per month, it is known as Hyperinflation.

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