Arya News - Inflation in Bhutan will largely mirror global price trends for essential commodities like petroleum and food, which heavily feature in the nation’s import basket, an expert says.
THIMPHU – The cost of goods and services in the country is projected to ease to 4.2 percent this year, according to the latest forecast from the Asian Development Bank (ADB).
While headline inflation is expected to see a slight uptick to 4.5 percent in 2024, this increase is anticipated to be temporary with moderating at 4.2 percent in 2025.
Economics Officer at the ADB’s Bhutan Resident Mission, Sonam Lhendup, said that inflation in Bhutan will largely mirror global price trends for essential commodities like petroleum and food, which heavily feature in the nation’s import basket.
The projected rise in inflation for 2024, up from 4.2 percent in 2023, he said is partly attributed to increased spending power following the civil servants’ salary hike in mid-2023.
However, as Indian imports constitute about half of Bhutan’s consumer price index, continuing moderation of inflation in India will help contain inflation in Bhutan.
With improvements in the global supply chain and moderate inflation in India, the ADB anticipates that average inflation in Bhutan will cool down to 4.2 percent in 2025.
The report stated that a slowdown in the inflation of non-food items had already contributed to a moderation of average inflation to 4.2 percent in 2023, down from 5.6 percent in 2022. A mid-year fall in fuel prices last year partially offset price increases in sectors like healthcare, housing, utilities, and recreation.
However, the salary increases for public servants and higher food prices in the latter half of 2023 caused a rise in inflation towards the end of the year.
Recent data from National Statistics Bureau shows that headline inflation in February climbed to 3.38 percent, driven by increases in both food and non-food indices.
Despite this, the annual average national headline inflation for 2024 eased to 2.82 percent, a significant drop of 1.41 percentage points from the 4.23 percent recorded in 2023. This downward trend is primarily due to slower increases in both food and non-food prices.
Average food inflation decelerated sharply to 0.48 percent in 2024, a considerable decrease from the 3.97 percent in 2023. This was because of easing prices in food and non-alcoholic beverages to 0.49 percent, as well as alcoholic beverages and betel nuts to 0.24 percent.
At the same time, the non-food index decelerated to 0.25 percent in 2024, down from 4.44 percent in 2023, mainly due to drops in communication and transport costs to -0.64 percent and -0.14 percent, respectively.
Historically, Bhutan’s economy has been strongly influenced by India due to close geopolitical, cultural, and economic ties.
The pegging of Bhutan’s currency to the Indian Rupee limits the effectiveness of monetary policy in managing inflation and reserves, making the country reliant on fiscal policy and macro-prudential regulations.
Consequently, much of the inflation experienced in Bhutan is a result of cost-push inflation originating from the Indian economy.
In the long-run, finance ministry stated that the potential increases in food prices might require government intervention through targeted fiscal measures to provide social safety nets for vulnerable groups.