NSB to overhaul Inflation Calculation

In the last Parliament session both the National Council and the National Assembly passed a resolution to direct the the National Statistical Bureau (NSB) to reexamine the method of calculating inflation to correct any anomalies and ensure that the calculation reflects the economic reality in Bhutan rather than just following international methods that may not apply to Bhutan.

The Finance Minister informing the house on the implementation of the resolution said the calculation of the inflation is customized to the requirement of the local context while at the same time, the basic formula and standards of the international requirements are included in the calculation.

He said the calculation of inflation has always been dynamic and the National Statistical Bureau has been directed to evolve the calculation of the inflation to reflect the economic reality in Bhutan.

The NC and NA resolutions are based on a story by The Bhutanese pointing to various flaws in measuring inflation in the country which led to inflation in Bhutan being hugely underestimated.

A NSB official said that as reported in the Parliament the NSB is carrying out a thorough review of how the inflation will be calculated.

It said one of the measures will be to provide a separate inflation index just for Thimphu as the rent, price of goods etc in Thimphu is much higher than the rest of the country.

He said that when the national inflation data is presented then Thimphu’s inflation is pulled down due to the lower averages elsewhere.

He said a separate inflation data for Thimphu will give the ground reality.

He said then by January or latest by April 2024 they will update the weightage and items to calculate inflation as the current one is based on the consumption pattern of the Bhutan Living Standards Survey (BLSS) 2017 and so its needs to be updated to BLSS 2022.

He said the new things is that while updating it they will look at everything like how many items should be there and what is the weightage that should be given.

The weakness of the current inflation calculation system as pointed out by this paper before is that there are too many items and sub-items (314) in the basket for a small country and this ends up showing inflation to be lower then it is, once the items are averaged out.

The other problem is that the weightage distributed among them is not realistic and this is because its depends too much on presumed data from BLSS then actual ground data.

For example, this weightage system claims that people spend only 11.57% of their income on house rent, house utilities like power and water bills, household equipment and maintenance.

It is a known that fact that when it comes to house rent in cities like Thimphu and Phuentsholing which have the majority of rented accommodations people spend a minimum of around 30% of their income on rent going up to 50% and 60% of the total income.

The low weightage of 11.57% means that that even if rents go up sharply over the months and years then despite its massive impact on your purse it will not push up inflation much.

This apparent flaw in how your rent and utilities get such a low theoretical score is due to the fact that the CPI or inflation weightage is derived from the Bhutan Living Standard Survey (BLSS) of 2017 conducted every five years.

The flaw in the BLSS calculation of rent comes from the fact that since it is a living standard and consumption survey even if you are staying in your own home in the village not paying rent it comes up with possible rent you would be paying.

The BLSS 2017 says an estimated 63% of households in Bhutan own their dwellings and therefore pay no rent. These households were asked to impute (estimate in absence of real data) the rental value of their dwelling units, as were other households provided with free or subsidized housing by employers or other entities.

The more accurate way to do it would have been to survey representative and actual rent pay households in both urban and rural areas and then come up with an average.

However, the imputation guess work for the majority who do not pay rents actually ends up really pushing down the impact of rents on inflation data.

For example, as per the BLSS 2017 the average Bhutanese household size of 4.2 people has a monthly income of Nu 33,343 and of that spends only Nu 2,881.2 on rent per month. One can already see how imputation has distorted the rental data which is then used by the NSB to assign weightages.

Lower inflation data also makes our GDP look better than it actually is because to get the real GDP the nominal GDP has to be discounted by the deflator and the deflator is closely dependent on inflation data.

Real income is also calculated after adjusting for inflation so even our income looks high.

The lower inflation data will also lead policy makes to underestimate the economic pain that ordinary people are going through.

The NSB official said that to help them in this exercise they have an expert called in from the International Monetary Fund (IMF) headquarters.

The aim will be to reflect the ground realities as much as possible in the inflation data and at the same time make sure it is internationally acceptable or comparable to other countries.

The official said they will do a presentation to the Parliament and media once the exercise is done.

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