Sunday, June 1, 2008

Stagflation in Nepal

The Kathmandu Post reports that sustained low growth, rising food prices, and high unemployment in the Nepali economy might be a case of stagflation.

Leading experts view the current inflationary pressures combined with low growth rate of around 3.5 present represents initial indications of stagflation, an economic condition of rising prices, high unemployment and slow growth.

“There has been sustained price rise, albeit with declining output which means growth will shrink in the coming days. Since investments are shrinking, the unemployment situation will deteriorate,” Professor Bishwambher Pyakuryal told the Post explaining how the economy portraits a gloomy outlook.

Inflation in the country in the first quarter was around 8.9%. Inflation rate has been hovering around on average of 7% for the past three years. Meanwhile, GDP growth rate is around 2.5-3%. Well, I am not sure whether this is stagflation or an indication of this, especially when the price rise is caused chiefly due to rising food prices and fuel prices (both of them are technically temporary). The inflation rate would have been much more higher had the government not subsidized petroleum fuel products for more than three decades. Consumer demand has been pretty much static for the past couple of years. So, the upward pressure is coming from producers trying to refill depleting stock. People are unnecessarily raising the alarm!