Indecision on price hike may lead to crisis

Indecision on price hike may lead to crisis
ArthaExpress, 4-Oct-07

The government’s indecision on petroleum price is harmful and could lead to a serious crisis, leading experts say. A high-ranking official in the research department of Nepal Rastra Bank (NRB) says that increasing petroleum prices will not have a significant impact upon the Nepali economy and should be increased immediately. Not doing so, he argues, is taking a terrible toll on the economy.

According to NRB officials, the direct and indirect effects of increasing petroleum prices would add less than 1.3 per cent to the current inflation rate. This rate is based on international crude price of $80 per barrel.

The NRB official, who didn’t want to be named, said that the scarcity of petrol is taking a terrible toll on the Nepali economy as unscrupulous dealers are mixing petrol with harmful substances. According to the official, this is having a significant effect on vehicle life and therefore on depreciation costs. “This subsidy is like carrying a cancer,” he said, “The more we delay the treatment, the more insidious will its spread be.”

Finance Ministry officials also argue that the subsidy on petroleum products is benefitting only urban population and the subsidy should be scrapped. That is why it is not releasing any money to the Nepal Oil Corporation (NOC). Vidhyadhar Mallik, the secretary of the ministry, says that if petroleum prices are raised, only urban dwellers will be affected and the vast majority of the farming population will not be hurt.

Other economists, however, say the price rise should be gradual, as a sudden price rise may have a very big symbolic effect and lead to panic. Dr Biswomber Pyakurel, a prominent economist, says that there is currently suppressed inflation because of the subsidised oil prices. “This type of inflation occurs in controlled economies and is reflected in rationing, shortages and black market prices. The cumulative effect of such inflation is that the inflation may reach nine per cent,” says Pyakurel adding that India has already announced internal hike of petrol prices by two rupees and this will add even more pressure on the Nepali economy.

“This may hit Nepal ha-rd because the economic growth rate is only 2.5 per cent. This situation may even be called stagflation.” Dr Hemant Dawadi of Federation of Nepalese Chambers of Commerce and Industry, says that the price rise will hurt people. “It is true that many people depend on agriculture in Nepal but the poorest of the poor live on daily wages. Imagine the impact of high inflation on them. That is why the government should have a master plan to get rid of subsidy. But no one is thinking alo-ng these lines. We should have a plan for three to four years. That is how the impact of the price rise can be mitigated.”