KATHMANDU, Oct 18 – The recent hike in the prices of petroleum products has adversely affected the urban lower class of people with fixed income in the short run, whereas in the long run it is likely to affect the aggregate economy by fueling inflation thereby eroding the competitiveness of exportable goods.
The historic low inflation rate of 3.4 percent that Nepal enjoyed last year will not continue in the current year simply not only because of recent fuel hike but also because of bouncing inflation in India.
“Though the petro-price hike would definitely escalate the current low rate of inflation, however, it is unlikely to exceed budget-targeted inflation of five percent, partially offset by huge inflow of Indian rice, ” says Yuba Raj Khatiwada, Chief Economic Advisor at Nepal Rastra Bank.
However, Dr Dilli Raj Khanal, economist and main opposition lawmaker, argues that the aggregate effects of the fuel hike on inflation would be in the tune of 4 percent. “The overall inflation could be close to ten percent in the current year given the sharp rise of inflation in India, which recently crossed over 7 percent,” he said.
The rate of inflation will be largely triggered by increase in transportation fare. Increase in fare by ten percent on average would push inflation up by around 1 percent.
Since the average hike in the transportation fare is most likely to hover around 20 percent, the aggregate affects of petro hike would at least be 2 percent.
The weightage of petrol in the National Consumer Index is only 0.3 percent whereas such weightages of kerosene and Liquefied Petroleum Gas are 1.81 and 0.6 percent respectively.
Likewise average share of transportation cost in the total expenditure of Nepalese household is only 4 percent on the average. Due to these nominal weightages remarkable changes in the household savings is unlikely to occur immediately.
Dr Khanal, however, argues that the post-price-hike effects would be visible in almost every sector of the economy.
“The cost of import would go up increasing the costs of our development projects, thereby widening our budget deficit. Similarly, since most of our exportable items are facing tough price competition in the international markets, rise in production and transportation cost would greatly shave off our competitiveness in export front,” Khanal said.
However, as the price of aviation fuel has remained unchanged, exports via air route would not be affected. But Khatiwada maintains the views that even if the government had not hiked the prices, the export sector would have been impacted since India had raised the petro prices before Nepal.
From the consumers point of view, the price hike will hit most the urban and sub urban lower income groups who chiefly use kerosene as cooking fuel. And it is over cent percent rise in the prices of kerosene (open market price), which in itself is “unprecedented”, that has exasperated the consumers most.
“The 3 liters per household per month quota of subsidized kerosene is something ridiculous ” says Prakash Raut, a local resident of Ghathghar, Bhaktapur.
Before the kerosene price hike, Raut used to spend Rs 195 per month in kerosene for his 7-member family. However, after the hike, he is making a gloomy projection of additional Rs 163 per month of spending in kerosene. Such unanticipated rise in their monthly expenditure is likely to severely hit people in the lower income brackets, especially the labour class and students away from their home.