Banks and private sector yet to come to consensus over monetary measures

Global trends instigate inflation in Bhutan

Geopolitical scenarios, inefficient output, stringent monetary policies around the world exacerbated by the pandemic are causing the ripple effects

The recent build-up of inflationary pressure in the past year was largely attributed to rise in housing and food prices in Bhutan concurrently with global scenarios. Although the headline inflation averaged at 4.7% over the last 5 years, the outlook for this year remains highly uncertain due to the increasing geopolitical fragmentation and lingering effects of monetary policy tightening in advanced economies, according to the Royal Monetary Authority (RMA).

Global and regional inflation

The global inflation reached multi-decade high in 2022, well above most of the central bank’s target, in the wake of pandemic shock and geo-political tension. As the monetary policy tightening gradually rebalanced the aggregate demand towards potential output and supply chain disruptions started normalizing, the global headline inflation has moderated in 2023. However, the underlying price pressures continued to remain elevated with fresh conflicts surfacing in the Middle East.

According to the IMF World Economic Outlook, October 2023, the global headline inflation eased from 8.5% in the first quarter of 2022 to 4.9% in the second quarter 2023, due to tightening monetary policy and fall in global energy price, particularly the crude oil prices as a result of increase in oil supply by the Non-Organization of Petroleum Exporting Countries (OPEC). The decrease in global fuel price supported the softening of global food prices, particularly pass-through effect to transportation cost. As a result, global inflation is expected to steadily decline from its peak of 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024.

On the regional front, Indian headline inflation moderated from 7% in June 2022 to 5.9% in June 2023, which was in response to monetary policy action and supply side measures initiated by the government through subsidies to edible oil import duty. However, inflation jumped to 7.4% in July 2023 and 6.8% in August 2023, due to rising food prices, vegetable prices and waning base effect. On the other hand, core inflation (excluding food and fuel) has been gradually ebbing down to 5.1% with moderation of transportation fares and communication services.

Domestic inflation

The domestic Consumer Price Index (CPI) headline inflation moderated in 2023, fluctuating within a range of 4.3 to 5% during January-September 2023. From the period of January to March 2023, CPI inflation moderated from 4.3 to 3.2%, a decrease of 110 basis points, recording the lowest inflation after the post-pandemic. CPI inflation thereafter started to marginally rise again from 3.3% in April 2023 to 5% in September 2023. The pick-up in the inflation during the period was broad-based resulting from higher pass through effect of increase in food prices in domestic economy and increasing prices in India. Moreover, due to waning base effects from April 2023, it also led to rise in headline inflation in September 2023.

The non-food inflation initially eased from 6.8% in January 2023 to 3.1% in June 2023, before reversing to a growth of 4.2% in September 2023. The marginal pick-up in non-food inflation was mainly due to broad-based pass-through effects of increase in prices of education and health, and volatility of global crude oil prices. Looking at the annual inflation trend, CPI headline inflation grew by 5.1% in September 2023 compared to 6% in September 2022.

Food Inflation

The food inflation (with weight of 45.9% of overall CPI basket) has seen considerable volatility, hovering within a range of 4.2 % to 6.1% from September 2022 to September 2023. The food inflation was recorded at 0.8% in March 2023, taking to the lowest in the post-pandemic from 1.5% in January 2023, and thereafter surged significantly to 5.9% in September 2023. The increase in food prices during the period was attributed to rise in global fertilizer prices. On the supply side factors, increase in the price of domestic dairy products (milk, cheese and eggs), vegetables and animal proteins were the key drivers of hardening food inflation in the second half of 2023.

The price of bread and cereals, and meat which combined constitutes 32.3% weight in food CPI basket had a sustained average growth at 6.3% and 3.3% respectively during the period.

Non-food Inflation

The non-food inflation which comprises of 54.1% of weight in CPI inflation recorded a gradual moderation in prices of major non-food components beginning from September 2022. The year-on-year non-food inflation grew slower at 4.2% in September 2023 as compared to 8.1% in September 2022, largely driven by price of education, health, housing and, recreation and entertainment. Among the drivers of non-food inflation, price of education increased sharply at 14.4%, followed by health at 12.6% and housing at 10%.

Meanwhile, the RMA’s role is to maintain the price stability to support economic growth through formulation of monetary policy. Since Bhutanese Ngultrum is pegged one-to-one with the Indian Rupee (INR), and also higher import dependence on India, the monetary policy independence is limited, posing challenges to achieve price stability objectives.

Given the economy closely integrated with Indian economy, Bhutan’s prices broadly follow movements in tandem with Indian inflation. According to the Central Bank, in this case, the inflation targeting monetary policy (4 +/-2% range) of the Reserve Bank of India (RBI), to some degree, safeguard price stability in Bhutan and cushion the inflation volatility from the exogenous shocks.

Tashi Namgyal from Thimphu