The War in Gaza -Implications for Bhutan

While experts in India are concerned over the Indian economy with the Israel-Hamas war, the Bhutanese economy will also suffer from the ripple effects

The latest conflict in the Middle East has introduced significant uncertainty into commodity markets that have been coping with the effects of an extraordinary series of shocks in recent years. According to the latest report of the World Bank, before the conflict began, voluntary oil supply withdrawals by Organization of Petroleum Exporting Countries and 10 affiliated member countries’ (OPEC+) producers pushed energy prices up by 9% in the third quarter.

Experts in India are concerned with the ongoing conflict which could bring fresh global gusts for the Indian economy, with elevated oil prices bringing up import costs and increasing prices for commodities and foodstuffs, according to an Indian source.

However, the latest World Bank report on commodity prices found that the wider economic impact of the Israel-Hamas war would be limited if the conflict doesn’t widen and the outlook for commodity prices would darken quickly if the conflict were to escalate.

However, history suggests that an escalation of the conflict represents a major risk that could lead to surging prices of oil and other commodities with an outcome that would intensify food insecurity in the region and across the world.

Commenting on the impact of Bhutanese economy with the crisis, an Economics professor at the Royal Thimphu College (RTC), Sanjeev Mehta said that economic performance of a country is closely associated with the developments in the commodity market.

He said that linkages between commodity market and growth are complex and strong.“Commodity prices tend to affect economic incentives and consequently induce decisions related to production, consumption, trade, investment, and employment also affecting allocation of resources, including natural resources, across various sectors.”

The professor said that largely stable commodity prices in recent times have pushed aggregate demand and has supported higher growth prospects both in India and Bhutan and the magnitude of the impact of commodity market trends in an economy is largely determined by its commodity dependence.

“Since Bhutan is a net importer of food, energy and other metal items, the impact of commodity market trends is likely to be larger in Bhutan,” Sanjeev Mehta said, adding thatt here would be a possible moderate to large surge in commodity prices in the medium term, especially of food and energy, depending upon the global political developments. This is likely to have an adverse effect on balance of payment, fiscal balance, economic growth, food security and poverty reduction in Bhutan.

Reflecting on the conflicts in the middle east, the professor opined that a surge in commodity prices is also likely to affect achievements on Sustainable Development Goals (SDGs), especially SDGs such as zero hunger, affordable and clean energy, and responsible consumption and production amongst the 17 SDGs.

“Countercyclical fiscal and monetary measures are usual policy tools,”the professor demanded on how the policy makers should respond in such situations, opining that it may not achieve desired results in Bhutan.

“I believe that this problem needs to be addressed through a long-term perspective of supply side management. We need to pace up efforts to boost agricultural production, reduce dependence on carbon fuels, and take measures to increase overall productivity of commodity-based inputs, mainly through the application of the right technology.”

“Technological choices, institutional capacity building and scaling up of the market based social protection system will play important roles in building a resilient economy,” he added.

Meanwhile, the report finds that the effects of the conflict are likely to be limited, assuming it does not widen. Under that assumption, the baseline forecast calls for commodity prices to decline slightly over the next two years.

Similarly,reports in the Indian media suggest that the although the price of commodity remains steady and stable so far in India, there will be more supply bottlenecks and not just regarding crude oil if Israel-Hamas war aggravates.

The magnitude of the effects will depend on the duration and scale of the supply disruptions, the World Bank report stated.

The latest conflict in the Middle East has raised geopolitical risks for commodity markets. So far, its impact on prices has been small. However, previous military conflicts in the region often resulted in higher prices and volatility in commodity markets.

This suggests that an escalation of the conflict could trigger sharp oil supply disruptions, depending on the duration and scale of the escalation. In the third quarter, before the latest conflict, the World Bank commodity price index rose by 5% over the previous quarter, driven mainly by an 11% surge in oil prices.

Sherab Dorji from Thimphu