Inflation, budget deficit continue to rise

Over the last few months, Nepal has been experiencing rise in inflation. Food and beverage prices have pushed inflation up as it posted 9.2 per cent in mid-May from 4.6 per cent last year whereas the year-on-year salary and wage rate index rose by only seven per cent in mid-May, compared to a rise of 11.9 per cent a year ago.
"Inflation is mainly driven by the 13 per cent rise in prices of food and beverages during the review period. The price rise of food and beverages was 6.1 per cent a year ago," according to the current macro-economic situation report of Nepal Rastra Bank, based on the first 10 months' data of the current fiscal year.
Prices of rice and rice products of this sub-group increased by 25.2 per cent compared to an increase of 3.8 per cent a year ago. "Of the items showing price rise, price indices of the edible oils and ghee sub-group increased by a whopping 27.6 per cent on a y-o-y basis in May compared to an increase of 9.9 per cent last year," states the central bank report. Region-wise, the price rise in Tarai region is 10 per cent followed by 8.6 per cent in the hills and 8.5 per cent in Kathmandu Valley. Last year, it was five per cent, four per cent and 4.4 per cent, respectively.
Despite pressure on salary index on account of hike in salary of civil servants including security personnel, teachers and employees in public enterprises by 17 per cent in July 2007, pressure on wage rate index with a higher weight remained modest resulting in a rise of national salary and wage index in the review period at the same rate as in the previous year.
The wage rate index increased by 5.9 per cent in the review period compared to an increase of 13.8 per cent in the same period last year. Wages of agricultural, industrial and construction labourers increased by 6.3 per cent, 4.6 per cent and 7.1 per cent, respectively, in mid-May 2008. Last year, they increased by 10.9 per cent, 19.2 per cent and 11.5 per cent, respectively.
Similarly, government budget deficit has also amounted to Rs 6.4 billion in the first 10 months of the current fiscal year. The budget was at a surplus of Rs 2.86 billion in the corresponding period last year. "The relatively higher growth of government expenditure resulted in the budget deficit in the review period," states the central bank report.
Domestic financing of the budget deficit through the issue of securities (excluding overdrafts) amounted to Rs 13.33 billion in the review period. The government's cash balance with NRB amounted to Rs 9.87 billion in mid-May 2008. Including the cash balance of Rs 3.12 billion for the previous year, the cumulative cash balance reached Rs 12.99 billion in mid-May.
However, net domestic borrowing of the government remained at a negative of Rs 1.94 billion on account of repayment of Rs 5.40 billion domestic debt and cash balances to the central bank in the review period.The outstanding domestic debt — including cash balance with NRB — of the government stood at Rs 94.24 billion in mid-May. Such outstanding debt was at Rs 96.18 billion in mid-July 2007.The external financing of budget deficit amounted to Rs 3.12 billion, showing a 26.1 per cent growth from the level of a year ago. In the previous year, the government had received foreign debt amounting to Rs 2.47 billion.
In the first ten months of 2007-08, revenue mobilisation soared by 24 per cent amounting to Rs 78.99 billion compared to an increase of 22.5 per cent in the corresponding period last year. Such an impressive growth of revenue was on account of substantial increase in the import of merchandise goods.Of the total revenue mobilisation, VAT revenue grew by 21.8 per cent to Rs 25.3 billion in mid-May. "Growth in VAT revenue was on account of growing imports and consumption induced by the rise in remittances and reforms in VAT administration such as establishment of Large Taxpayers Unit (LTU), strengthening of billing system and non-filers management," the report states.
In the review period, customs revenue rose by 21.5 per cent to Rs 16.16 billion compared to an increase of 13.1 per cent in the same period of last year. Reforms in customs administration, increase in imports of high tax yielding vehicles and spare parts as well as a rise in the amount of Indian excise refund contributed to such a high growth of customs revenue.
In the review period, excise revenue increased by 23.9 per cent to Rs 8.32 billion compared to an increase of 36.3 per cent in the same period of the previous year. Reforms in excise administration, and identification of new excisable goods also accounted for higher excise revenue in the review period.
Income tax revenue increased by 34.4 per cent to Rs 13.87 billion in the first 10 months of 2007-08. The evolution of the corporate culture on account of the growth in banks and financial institutions contributed to such a higher growth of income tax collection. Last year it had risen by 32.1 per cent.