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10% rise in fuel prices to push inflation to 4.9%

Economic Affairs Minister says that fuel prices have a huge impact on inflation

As consumers in the country feel the pinch of the rising food inflation over two years, the recent hike in fuel prices is likely to squeeze household budgets, forcing low-income consumers to tighten their belts.

The recent increase in fuel prices by 10% will have 4.9% direct cost inflation within three months, according to the Economic Affairs Minister Loknath Sharma.

“It will have devastative impacts on the economy when we are trying to pick up better from the pandemic,” the minister said, adding that not only the food baskets, it will increase the prices of industrial raw materials, transport and logistics, and export.

Lyonpo said that the crude oil price went as high as USD140 per barrel recently and remained at USD120.

“Our prices are the export price of India which is crude oil plus refinery transfer price. Thus, any increase in the price of crude oil will have a direct impact on the selling price of dealers from India,” Lyonpo said.

The minister shared the observation that fuel prices might not go very low quickly and crude oil prices could stay above USD110 per barrel for some months from now.

“We are expecting that it could settle at around USD 100 per barrel by another three-month time or later. The government has very few tools in hand and we are trying to see the best and quick possible interventions,” Lyonpo said.

The fuel prices hit a new record high in the country last week. The price of petrol increased by more than Nu 10 per liter in Thimphu, while diesel saw an increase by more than Nu 17.

According to Lyonpo Loknath Sharma, fuel has a significant contemporaneous effect and a lag effect of three-month period. The result indicates that an increase in fuel prices by 10% would increase monthly inflation by 3.6% within a month, and further pushes inflation by 1.3% after three months. The total indirect effects of fuel prices on inflation are about 4.9%.

“If fuel prices increase by 10%, other factors remaining constant, the total increase in inflation will be 4.9% after three months from now,” Lyonpo said, adding that fuel prices have a huge impact on inflation.

Lyonpo added that the higher volatility in fuel prices and the difficult geographical terrain for transportation of both food and non-food items in Bhutan is largely influenced by changes in fuel prices.

Meanwhile, as an alternative, to minimize the impact of fuel price shocks on inflation, some people suggest that households must switch to clean and domestically produced energy such as electricity.

A taxi driver in Thimphu said that electricity is cheaper than imported fossil fuel, and the tariff for electricity is stable and more predictable and will prevent households from experiencing a frequent price adjustment driven by changes in fuel prices.

The annual report of the Royal Monetary Authority (RMA) also states that to incentivize households to use electric vehicles, existing fiscal incentives such as import duty and green tax exemptions, reasonable access to transport loans from banks, and monetizing vehicle quota system for the public servants must be encouraged. 

“Such a policy will not only help minimize the fuel price impact on inflation, but will also help protect our natural environment and reduce import dependency,” states the report.

Further, the report recommends that the government must strive to institute a prudent and sustainable mechanism supported by sustainable policy options in managing different sources of energy optimally and efficiently using modern technological innovations to support human livelihood, economy, and the environment.

Kinley Yonten from Thimphu