How to address inflation pressure amid current economic hardship?

The authorities have always been intervening in the wrong areas to tackle the surging price level in the economy.

Prience Shrestha

  • Read Time 3 min.

Inflation apparently is one of the least understood macroeconomic variables in the Nepali economy. This statement made by a renowned Nepali economist is at least relevant among the policymakers and government authorities who appear to be oblivious regarding the actual causes behind the growing inflation pressure that is notoriously affecting the affordability of the general Nepalis, more so during the unusually difficult time as now.

The obliviousness of the authorities can be witnessed from the fact they have always been intervening in the wrong areas to tackle the surging price level in the economy usually observed during the beginning of the festival time of the year. As such, the authorities have repeatedly resorted to the approach of reining market prices of goods and services ranging from foods products, apparel, and accessories in their campaign to subside inflation pressure in the cities and beyond. And, the victims of such approaches that involve surprise raids by the government monitoring units have always been the stores and restaurants located in the city centers and shopping complexes.

It appears that the incentive for the government to pursue market raids originates from the belief that the practice of so-called over-profiteering and securing excess commissions by the traders, middle-men, and businesses who charge exorbitant prices for the goods and services sold in the market are mostly to be blamed for creating the situation of unaffordability among the urban dwellers and marginal income earners. Instead, it is essential to recognize that prices for goods and services traded within an uninterrupted market mechanism are the results of voluntary interaction between the buyers and sellers, and it always reflects the affordability and income pattern of the consumers. As such, it is important to recognize that the surging prices of staple foods and basic commodities that have failed to reflect the affordability of the vulnerable income groups is instead the result of artificial supply disruption created by cartels and other market defying practices than the work of the market function.

In underlining the role of cartels in fabricating supply disruption and price surges beyond the affordability of the general Nepalis, the instance that involved cartel of domestic sugar mills lobbying the government to restrict the import of sugars later culminated skyrocketing prices of sugar in the market during last year can be correctly illustrated. The unnatural price upsurge had followed the artificial shortage of sugar fabricated by the domestic sugar mills after sugar import was legally restricted. The repercussion was heavily felt in the prices of sweets and confectionaries during the last festival season, and it undoubtedly took a heavy toll on the consumers.

A similar instance of market tampering activities during the nearing festival season can quietly repeat as the increasing opaqueness in the market amid the currently imposed heavy-handed lockdown orders will make it easier for the syndicates to proceed with such malpractices. Only that the brunt is likely to be even more painful as the restriction measures imposed by the government have already sent the price of food items skyrocketing.

Apart from artificial shortage created by cartels of producers and distributors, inefficient distribution of refined petroleum by a state monopoly, politicization in the distribution of seeds and fertilizers by the government, unscientific taxation, and customs duties are equally to be blamed for contributing to creating the inflation pressure that clearly leaves behind the purchasing power of the general people.

Politicization in the distribution of seeds and fertilizers by the government, unscientific taxation, and customs duties are equally to be blamed for contributing to creating inflation pressure.

Henceforth, approaches that intervene on the aforementioned supply disrupting factors are expected from the authority and policy authors in order to effectively address the notorious inflation pressure in the economy already stricken by increasing prices manifested following the acute supply shortages amid current logistical restrictions. And the resolution essentially is to insert market mechanisms in the areas appropriated by supply disrupting and market defying practices. As such, approaches that disable cartels from dictating the supply and prices of vital commodities loosen the state monopoly in the distribution of refined petroleum and liberalize taxation and trade policies to allow the least distortion of the market function are recommended.

On such grounds, a substantial task remains for the authority and policy authors to reverse their course of direction by intervening in areas where the market mechanism is sidelined than waste effort in restricting the function of the market. Acknowledging this recommendation and acting accordingly could not be any more crucial than in ongoing difficult times in order to even slightly relieve the general Nepalis already haunted by public health emergencies and paralyzing episodes of restriction orders.

Prience Shrestha is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. Views expressed in this article are the author’s own and do not represent the views of the organization.

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