An inflation report of the Ministry of Economic Affairs (MoEA prepared re¬cently by the Office for Consumer Protection under MoEA and the National Statistics Bureau titled ‘Report on Price Increases & Inflation Management’ tracks among other things inflation trends in the last four years.
It says that headline inflation in Bhutan has been on upward trajectory since the start of the 10th FYP, due to increased investments in hydro power and social sectors and credit expansion. This in turn has led to a surge in price and demand levels.
Prices of consumer goods and services, as measured by CPI, have gone up by 26.86%, increasing at an average rate of 9 per annum from 2011 to April 2014. This implies corresponding erosion in the purchasing power of the Ngultrum by 21.66%, or reduction in the disposable income of fixed income earners and pensioners and their standard of living.
Bhutan recorded double digit inflation at 10.91% for the first time in 2012. Such high inflationary trend, by all standards, is considered to be detrimental to the medium to long term growth of the economy. The current inflation rate as of April 2014 hovers around 8.60 %, which is still on the higher side according to the report.
The report found that the main driver of the overall inflation, has been the food items – a phenomenon common to most neighboring countries in the region. Major food items such as rice, bread, meat, butter and vegetables have all increased on average by 9 to 13% since 2011 (see Table 2 ). Narcotics (Areca Nuts and Pani), which is typical of Bhutanese social habits, noted the highest increase of 35.65%. Within food group, about 43% comprised of domestically produced items while 57%.
It says that under non-food group, major items responsible for pushing the headline inflation, as shown in Table 3, are garments, foot wear, fuel and lubricants, and rentals. Clothing and footwear items have increased on average by 14% and 18% per annum respectively, which is very significant. Fuels and lubricants noted around 7% increase as the prices of these items are largely regulated and controlled by the state. Average rental inflation noted less than 6% since 2011. However its influence on the overall inflation cannot be ignored because of the higher weight (17%) in the CPI basket.
According to the report domestic items carry a weight of 47% in the CPI basket. Items falling under domestic inflation are mostly services like rental, telecom charges, postal services, electricity, water charges, cable services and repair charges. Since rates /tariffs of these services are mostly regulated by the state, the price movements in general is not as volatile as the imported goods.
Although domestically produced goods and services make 47% of the CPI baskets, the influence of imported inflation cannot be ruled out completely says the report. This is because most factor inputs such as raw materials and la-bor are all imported from outside. For instance, feeds, fertilizers, insecticides required for production of vegetables, fruits, eggs etc.; and construction and industrial raw materials including labor for production of rental, telecom and other services are directly or indirectly imported from India.
The latest data from Dec 2012 – April 2014 show maximum increase in repairs and maintenance of personal transport equipments followed by milk, cheese and eggs, electricity, bread and cereals.
The report says that imported items, on the other hand, carry about 53% weight in the market basket. In the food group, essential food items such as fish, meat, edible oil, preserved milk, sugar, and wine are 100 percent import-dependent, and they account for almost 57% of the total food items Under non-food category, about 50% of the items are imported goods and contribute significantly to the headline inflation.
In the past 16 months [Dec 2012 – Apr 2014] meat, clothing and footwear, milk, cheese, bread and cereals have all increased by almost 20%, followed by vegetable with 10.63% giving upward bias in the price levels (see Table 5 above). This phenomenon is likely to persist as long as we continue to rely on imports for our day-to-day consumption needs according to the report.
The report says that comparison of inflation rates in Bhutan and India revealed that the overall direction of price movements or inflation pattern is very similar. The year-on-year inflation for the period ending April 2014 recorded 8.60% for Bhutan and 8.59% for India. Barring exceptions in 2009 and 2010, inflation rates over the years have been comparable, and differences were negligible at less than 1 percentage points.