In a world that has become increasingly interconnected, events in one part of the globe inevitably affect others. While Bhutan may not directly face the same challenges as other countries, its strong trade links with India, Bangladesh, Nepal, and other Asian nations impact Bhutanese markets, leading to inflation. The influence of India is particularly significant, as food items play a major role in driving inflation, more so than non-food items. Since most goods are imported from India, market conditions and price fluctuations there largely determine inflation in Bhutan.
The Royal Monetary Authority’s latest Monetary Policy Statement for 2024 provides a comprehensive overview of inflation and the factors at play.
According to the RMA, Asian economies, depending on the country group, have experienced varying degrees of price fluctuations in line with global developments. Although inflation in Asia declined in 2023, inflation in certain country groups, such as Advanced Asia and Other Emerging and Developing Asia, exceeded projections (WEO fall & spring publications).
Bhutan falls into the Other Emerging and Developing Asia group. According to the RMA, currency depreciation and its pass-through effect on international trade, fuel, and agricultural inputs remain key challenges. In South Asia, inflation surged in Bangladesh and Nepal in 2023, while India, one of Bhutan’s key trading partners, experienced a decline. Inflation in Bangladesh rose significantly from 6.1 percent in 2022 to 9 percent in 2023, driven by higher oil, gas, and electricity prices imposed by the government, substantial food imports, depreciation of the Taka against the US dollar, and import controls due to foreign exchange reserve challenges.
Unlike Bangladesh, where inflation spiked in 2023, Nepal has experienced a steady increase in inflation over the past two years. Higher oil and commodity prices, along with the depreciation of the Nepali rupee against the US dollar, have been the main drivers of inflationary pressure in Nepal.
The RMA notes that in the South Asian region, volatility in food prices remains a key challenge, as the inflation outlook hinges on evolving food prices. Additionally, geopolitical tensions in West Asia, the ongoing war in Ukraine, and trade disruptions pose significant supply-side shocks. Agricultural crops and food security are particularly at risk, as South Asia is increasingly vulnerable to rapid temperature increases.
The rise in food inflation in Bhutan is mainly driven by the increased import of key food items such as bread, cereals, and vegetables from India, making Bhutan susceptible to price fluctuations in the Indian market. According to Bhutan Trade Statistics, cereal imports, one of the major components of the food basket, increased by Nu 527.2 million, rising from Nu 3,528.8 million in 2022 to Nu 4,056 million in 2023.
Imports of cheese and curd during the same period also increased by Nu 10.3 million. The increase in food inflation during December (up by 5% compared to 1.5% in the previous period) followed Indian prices, as food and beverage inflation in India was around 8% in December 2023.
However, a deflationary trend in the oils and fats sector provided slight relief, due to a reduction in international prices, weakening global demand for edible oil, and a reduction in import duties by the Indian Government. On June 14, 2023, the Indian Government reduced the import duty on refined soybean and sunflower oils to 12.5% from 17.5%, a policy that has now been extended until March 31, 2025. Additionally, the basic duty on crude palm oil, crude soybean oil, and crude sunflower oil has been eliminated, dropping from 2.5% to zero. This has benefited Bhutan, which imports the majority of its oils and fats from India, directly passing the savings on to consumers and providing swift relief.
Meanwhile, core inflation (excluding food and fuel) has fluctuated between 5% and 7% over the last three years, reaching a peak of 7.2% in the second quarter of 2023. As of March 2024, year-on-year core inflation was 6.2%, an increase of 0.1% compared to March 2023. The rise in core inflation to 7.2% in March 2024, although primarily driven by goods, was broad-based across goods and services segments.
On the other hand, non-core inflation fluctuated across different periods, but the annual change has been much lower compared to core inflation. The increase in non-core inflation to 4.1% in March 2024, compared to 0.1% a year ago, was significantly impacted by the change in the food price index.
Since July 2023, non-food inflation has remained comparatively lower than food inflation. Although year-on-year inflation in housing lingered around 2% from April 2023, transport and communication experienced disinflation, mitigating the overall non-food inflation increase during the review period. The moderation in non-food inflation was primarily driven by disinflation in transport and communication prices. “The moratorium on vehicle imports, initiated in August 2022, coupled with the decline in fuel prices throughout 2023, had a sustained impact on transport and communication.”
On the other hand, rising costs of construction materials and labor, along with the implementation of the Property Tax Act and the decline in anticipated housing supply resulting from the suspension of housing and hotel loans by the RMA, have collectively contributed to increasing housing prices in the economy. “The rise is mainly due to alternative means of covering the property tax; homeowners and landlords opt to increase house rents, accounting for 16.9% of major non-food expenditures in Bhutanese households.”
Meanwhile, core inflation, which accounts for 61.3% of the total Consumer Price Index (CPI), reached 6.1% in March 2024, up from 4.7% previously. The increase was largely due to a 1.4% rise in clothing and footwear prices, along with modest increases in housing rents, vehicle maintenance, and household maintenance. Certain categories, like health and education, had minimal effects on core inflation, while transportation prices decreased.
Demand for vehicle maintenance has surged due to the ban on vehicle imports, leading consumers to prioritize preventive care for their existing vehicles. Inflation in the housing sector is also influenced by increased public sector wages. The restaurant sector, which holds a 6.7% weight in the core CPI, showed a growth of 0.5% in March 2024, recovering from near-zero growth and deflation in 2020 and 2021.
The Purchasing Power of Ngultrum (PPN) measured by CPI was Nu 56.4 in March 2024, reflecting a 4.8% decline over the past year.
Looking forward, inflation is expected to be influenced by both domestic factors, such as the end of moratoriums on vehicle and construction activities in mid-2024, and global factors like food price volatility in South Asia, geopolitical tensions, and ongoing conflicts. “These challenges particularly threaten agricultural production and food security in the region. In the South Asian region, volatility in food prices remains a key challenge as the inflation outlook hinges on evolving food prices.”
Furthermore, geopolitical tensions in West Asia, the continuing war in Ukraine, and trade disruptions pose significant supply-side shocks. Agricultural crops and food security are particularly at risk, as South Asia is increasingly exposed to rapid temperature increases.
By Nidup Lhamo, Thimphu
