Pokhara University || Spring 2014 Macroeconomics || BCIS Notes

Amid fears of price rises due to a surge in economic activities in the reconstruction process, the central bank has been resistant in taking any concrete measures to control prices. It has aimed at expanding credit to the private sector by 20 percent against 17.8 percent last fiscal year, which is expected to create more demand and contribute to higher inflation.

It was expected that to tackle the expenses of the huge budget of the fiscal year 2072/73 and also to deal with the current surplus liquidity situation of the banks, monitory policy 2072/23 is likely to bring an increment of 0.5 percent to 1 percent in Cash Reserve Ratio (CRR) but CRR remains the same i.e 6 percent for Commercial banks, 5 percent for Development banks, and 4 percent for Finance companies.
The Statutory Liquidity Ratio  (SLR) also remains the same as last FY 2071/72.

However, central bank officials said they were hopeful low inflation levels in India over the last year, could help maintain the price at a controllable level here as Nepal imports two-thirds of goods from India.

The inflation target seems good. But from the pragmatic perspective, it would be hard to keep inflation below 8.5 percent. The government has not been able to ease the supply-side constraints. Likewise, there will be inflationary pressure from the demand side since there will be a large flow of funds for reconstruction and rehabilitation projects in the aftermath of the earthquake. Money that goes into the hands of the public leads to the rise in demand for the food or service sector, which leads to a price hike.

It will find difficult to keep the annual inflation at 8.5 percent if reconstruction work speeds up in line with the fiscal policy. However, government inefficiency in development spending could help the central bank contain inflation as low spending would not fuel price hikes.

Likewise, the supply side factor also plays a vital role in inflation. The recent economic survey also pointed out an increase in the price of foodstuffs due to a drop in agro production and a rise in the price of non-food items and the service sector due to disturbance in the supply system, among others, as factors that will push inflation in the coming days.

It will be challenging to contain inflation within an appropriate level, Thus it is imperative that we coordinate between fiscal and monetary policy to manage the demand side by strengthening the supply side and remove structural barriers for maintaining price stability.

Questions:

a)    What do you think that the people expect from a good monetary policy? [3]

b)    What type/types of possible inflation are discussed during the fiscal year 2015-16? How? [4]

c)    What are the major expectations that would help in maintaining the desired level of inflation rate? [3]

d)    Using the IS-LM approach, explain the possible impact on the equilibrium rate of interest by monetary policy 2015-16. [4]

e)    In your opinion, what are the strengths and weaknesses of this monetary policy of the -fiscal year 2015-16? [4]

f)      Do you think that monetary policy and fiscal policy are interdependent? Why or why not? [2]