Nepal's central bank warns of stagflation if crisis not solved

With inflation reaching double digits to touch a three-year high, Nepal's central bank has warned that the country faces the grim prospect of stagflation if the political crisis over its new Constitution is not resolved to end the protests by Indian-origin Madhesis.
Nepal Rastra Bank (NRB), the central bank, has warned of stagflation as consumer prices shot up by more than 10 per cent in November, while economic growth is expected to drop to lowest in around one-and-a-half decades.
In economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

Nepal's economy was severely hit after the April 25 earthquake followed by the political turmoil in the southern plains by Indian-origin Madhesis for the last four months.
Nepal had contained inflation within single digit in the last 23 months. But in November, it stood at 10.4 per cent the highest in the last three years, according to the latest Macroeconomic Report of NRB.
"The underlying factors for surge in overall inflation have invariably been prolonged strikes in the Terai, the blockade of trade routes in the country's southern part and ensuing hoarding of essential items," the report said.

In November, inflation rate grew at a faster pace in India and stood at 5.4 per cent, as against five per cent in October. This helped build inflationary pressure in Nepal in November, The Himalayan Times reported.

But what is striking lately is widening inflation wedge between Nepal and India. In November, for instance, consumer inflation stood at 10.4 per cent in Nepal and 5.4 per cent in India, reflecting inflation wedge of five per cent, the daily said.
Inflation wedge in the same month last year stood at only 2.8 per cent.
"The rise in inflation wedge between Nepal and India was on account of lingering impact of earthquakes of April and May, strikes in the Terai and the recent blockade," the NRB report said.
"If the prevailing atmosphere (prolongs), rise in prices of essential items is likely to get entrenched, leading to a situation of cost-push inflation and stagflation," it said.

Nepal has never faced stagflation in the recent past.
The government has already said economic growth would stand at two per cent this year, the lowest since 2001-02 but many consider this estimate "optimistic".
A pessimistic forecast made by NRB on November 20, on the other hand, shows economy contracting by 1.1 per cent (at basic price) this fiscal year.
If this prediction comes true, Nepal will record negative economic growth for the first time since 1982-83.