Growing inflation pushes down value of Nu 100 in 2008 to Nu 75 in 2012

In 2012 54.25 percent of inflation was caused by domestic factors and only 45.58 was imported inflation. High Inflation also means high poverty rate and lower growth according to Economists.

Rapidly increasing inflation rate since 2008 till 2012 will negate high economic growth rates and also negatively impact the poverty alleviation achievements of the government.

Inflation from 2008 to 2012 has increase by 39.53 percent meaning that is the amount by how much more expensive living costs have become in Bhutan. Figures from the National Statistical Bureau show that prior to 2008 the inflation rate was relatively low but from 2008 it rapidly shot up with only a slight decrease in 2009.

As per the Consumer Price Index the inflation for the last 7 years is 4.10% in 2006,   5.15 %in 2007, 8.31% in 2008, 4.41 % in 2009,   7.02 % in 2010, 8.86% in 2011 and 10.93 % in 2012.

Decreased value of Ngultrum

In fact the high inflation has affected the purchasing power of the Ngultrum because as per NSB data Nu 100 in 2008 is now valued at Nu 75 in 2012 showing a 25% decrease. This also means a similar 25% decrees in the buying power of the Bhutanese currency.  Also Nu 100 in 2003 is now worth Nu 55 only today.

With the rupee crisis devaluing the Ngultrum by 10 percent against the rupee especially in border towns the actual current purchasing power of the Ngultrum is as low as Nu 65 since most imports are from India.

 

Most of Bhutan’s inflation is domestic in nature

Also contrary to popular opinion the NSB found that in 2012 the majority of Bhutan’s inflation was not due to imported goods but due to homegrown and domestic goods and services.

The NSB found that of the total consumption expenditure the domestic food, goods and services made up 54.24 percent while imported food, goods and services made up only 45.58 percent. This would also mean that 54.25 percent of inflation in 2012 was caused by domestic factors and only 45.58 was imported inflation.

In case of domestic inflation high house rents played a major role taking up more than 15 percent of the total expenditure by itself. This is followed by electricity and services like hotel, education, communication and transport services. In food products though the imported foods products are higher but it does not have a substantial margin over domestic food products.

For imported inflation the main factors are clothing, footwear, fuel, health, furniture, household and other appliances, purchase of vehicles, packaged food products and to a lesser extent food.

This was part of NSB’s efforts to segregate domestic and imported inflation as part of the National Living Standards Survey conducted in 2012.

NSB Director General Kuenga Tshering said, “In 2012 the domestic causes of inflation is higher because of the import restriction policy where there was less imports.”

The Director General said that in Bhutan domestic factors like house rent did influence inflation but there was strong influence from international factors like world food crisis, increasing cost of fuel, inflation in India, etc.

He also said that the high supply of money in Bhutan with the large tenth plan and ongoing mega projects also made inflation go higher.

However, head of the Center of Bhutan Studies Dasho Karma Ura said, “Although inflation is a central economic problem, it is a neglected issue in Bhutan. Most of this is due to unthinking and naive assumption that inflation depends on imported prices alone. The causation and mechanism of inflation are multiple as are its consequences. It imposes uneven tolls on different groups. It is time to be little more rigorous.”

 

High Inflation leads to more poverty

One major concern for Bhutan is its effects on the poor especially in the backdrop of the government’s claims of having reduced poverty from around 23 percent to 12 percent.

Associate Lecturer in the Department of Business and Finance under the Royal Institute of Management, Rinzin Dema said, “A lot of empirical studies and papers have shown that poverty rate goes up when inflation goes up as the purchasing power of people comes down. So poverty should be increasing with rising inflation. It is quite strange that poverty is going down with rising inflation. Either the poverty figures are wrong or some figures have been hidden.”

She, however, also said that since inflation reflected a wide basket of items it may not necessarily reflect the limited products that poor people buy. She said the only way to find out would be an annual door to door survey.

Economics Professor of Royal Thimphu College Sanjeev Mehta also echoed the same co-relation between inflation and poverty.

He said, “Higher inflation cuts down the real wages and adversely impacts poor people. Especially, when inflation is caused by food prices, the poor people are hurt more as they spend a larger fraction of their income on food. Because of this connection, higher inflation tends to add a few percentage points to the poverty rate in a country. This is true for Bhutan also.”

The NSB DG said, “If inflation is high and keeps on rising there is definitely danger of people who are on the poverty line falling back below the line. However, in terms of food poverty in Bhutan people still get enough calories to eat and people don’t have to miss meals due to price rise.”

The most important indicator for poverty is the food or calories intake and the ability of the poor people to purchase and consume enough of it.

However, Dasho Karma Ura’s figures on food and non alcoholic beverages show that food inflation could actually be higher than what the wide food basket survey of the NSB can capture.

Dasho said, “Poverty is measured in two ways: food and non-food. We should be sensitive to food poverty when food prices are increasing. Prices of most common food items did rise to double digits in 2011 and 2012. This is reflected in sharp increases our country’s total consumption of ‘food and non-alcoholic beverages’ in current prices, which rose from Nu. 8.01 B in 2009, to Nu. 10.4 B in 2010 which is a 23% rise, and further to Nu. 11.9 B in 2011 which is 15% rise. A similar trend continued in 2012.”

 

 

Inflation negatively impacts growth

There is also concern that high inflation could also negate the high economic growth rates projected by the government.

The NSB DG said, “Inflation will impact growth rates. If inflation shoots up very high then can it can wipe out growth totally. With inflation you have less to save and you also have to pay for the same thing and hence buy less.”

He, however, also said that conventional economics couldn’t really apply in Bhutan’s case as traditionally most of the inflation was import driven.

Rinzin Dem said that new studies have shown that high inflation over a long period negatively affects growth.

Sanjeev Mehta said, “Higher inflation is not good for growth. Only mild inflation acts as a tonic to the economy. Mild inflation means greater profit to the firms and they have more incentive to invest. Higher investment creates more employment. But as inflation rate becomes double digit, people’s expectations cause’s costs to rise, eating into firms’ profits. This in turn reduces profit and cuts down investment. There is another way to look at it, higher inflation reduces purchasing power of people, they spend less and aggregate demand is adversely affected. This hurts growth.”

Experts have also pointed out that another point to consider was that Bhutan’s growth rate was skewed in favor of sectors like hydro power that benefitted few people.

Dasho Karma Ura said, “Although real growth rate was 8.5% in 2011, growth rate in constant prices was 15.7% in tertiary (trade, hotels, finance, communications, government current expenditure) and below 4% in both primary and secondary sectors (agriculture and manufacturing sectors).  Hyper-growth in the tertiary sector is impressive, but it can generate less impact on equitable income distribution.”

 

Inflation figures questioned

An Economist pointed out that the NSB’s Consumer Price Index basket of 363 items to calculate inflation was actually lowering the real inflation rate.

“Most Bhutanese households will not be consuming so many items or they will be using it very rarely. The basket should instead focus on fewer food and non food items and inflation will then be even shown to be higher,” said the Economist.

However, the NSB DG disagreed saying that the basket was in fact brought down from 600 items and was based on international best practices. He also said that the within the basket food and non food items consumed most regularly by Bhutanese were given heavier weightage to convey an accurate inflation figure.

Sanjeev Mehta said that more numbers of commodities means better chances of finding the most realistic inflation rate. “But, this is conditioned to what bundle of commodities is added. If they are not so relevant, it may give a wrong picture (therefore there is a danger of manipulation),” he said. Rinzin Dem said that if the basket of goods does not reflect the correct weightage to goods then the figures could go wrong.

 

Double Inflation

One of the negative impacts of inflation can be ‘Cost-Push Inflation’ which happens when due to high inflation workers demand and pay raise which in turn further fuels inflation.

According to an Economist this scenario had already occurred twice in Bhutan with the two fold Civil Service pay hikes and resultant corporate pay hikes which was given to counter inflation but also resulted in higher inflation with rents, services, etc.

 

More timey NSB inflation data

Meanwhile the NSB with assistance from the IMF, Japan government and the World Bank is coming up with a new inflation report system that will give monthly inflation reports instead of just four times a year. This need was felt so that there is adequate and timely information for necessary monetary, fiscal and other measures.

The items are also being increased from 363 items to 438 items and are expected to be more flexible and up to date with the products in the market. The earlier inflation figures had its base in 2003 when the last BLSS was carried out but now inflation figures will take 2012 as the base year. Based on demand from the Royal Monetary Authority and other institutions the NSB will also segregate inflation into domestic factors and imported factors.

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5 comments

  1. what ever politicians or economist may say, but for a poor layman like me I can feel the pinch that i no longer can afford to have a good three square meals and a comfortable by lowest standard of shelter as i used to a 5-6 years back. GNH sounds loud but I am still struggling to embrace it.

  2. Inspite of rampant inflation and rising living costs, the govrnment did not do anythng to address this issue for us common people. How come the personal income tax rates lowest limit is still 1 lakh which was the calculation done 12 years ago in 2001? Even India -where things are cheaper than Bhutan- has recalculated their lowest income tax slab rate in tune with inflation and rising costs of living over the past decade. Maybe our government does not care that what one family could make do per annum with 1 lakh in 2001 is now just not possible or the same anymoe?

    • Very true, income rate slabs should increase with passage of time to allow for inflation etc to be calculated.

  3. passang dorji

    The DPT government had a blind eye towards housing crunch. The Tenancy Act was a big flop that never used..

    LOng live the Tenancy Act on the shelves.

  4. We Bhutanese depend on India for evrything-from basic salt to Aeroplane oil. We are at the mercy of India and other donar countries. We are simply boasting and condemning ourselves for very small/silly things.

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