June inflation at 3.83 percent

Thukten Zangpo

With a substantial pay revision for the public servants and armed forces coming into force since last month, many fear that the revision could drive inflation over the 3.83 percent as of June this year. 

While the Druk Holding and Investments and state-owned enterprises are also working on options for a pay raise.

The public servants’ pay rise alone would incur Nu 6 billion annually equivalent to about 2.89 percent of the country’s gross domestic product (as of September last year). Before the revision, the salary was costing the exchequer about Nu 15 billion annually. Of Nu 6 billion, Druk Holding and Investments will fund Nu 4 billion for two years.

This would mean injecting Nu 6 billion more money into the Bhutanese economy leading to increased economic activities as public servants with more money are expected to spend or invest. 

A substantial salary increase will increase the disposable income which can lead to higher consumer spending. An increased demand for goods and services could potentially drive up inflation, affecting the cost of living for everyone.

A private sector employee, Sangay said that he is worried that with the pay raise for the public servants, cost of goods and services would increase. “It would be difficult for us to survive,” he said.

Economic theory suggests that supply and demand for money determines the inflation rate. For example, if the money supply increases by 4 percent per year while money demand rises by 2 percent per year, then inflation will be 2 percent. In short, inflation occurs whenever the supply of money grows faster than the demand to hold it.

Economists say that a pay raise for the private sector has a direct impact on the prices of goods. Suppose a company producing packaged chips increases workers’ salaries, then it may need to charge customers more in order to do so.  However, it does not apply for public servants who are employed directly by the government, he added.

Majority of the private employees are poorly paid compared with the government and corporation employees and a revision would be difficult with the  sector still recovering from the Covid-19 pandemic.

President of the Construction Association of Bhutan, Trashi Wangyel, said that contractors relying on the government capital budget for construction are worried. There were no contract works awarded in the last three months, he said.

“In such a situation where the very survival of businesses are at stake, a pay raise in the construction industry is out of the question except for construction companies that are fortunate enough to have been awarded direct award of works in hydropower and others,” he said.

Trashi Wangyel added that the industry has no potential and the situation looks grim for the majority of contracts with delays in government spending and with transition of governance in a few months.

The public servants’ pay raise will widen the income gap between civil servants and employees in the private sector.

Discontent with public servants’ salary raise, a corporate employee said that she is demotivated at work because her grade at par to civil servants receive 50 percent more salary than her.

With higher disposable income, civil servants would also contribute more to the government revenues through increased tax collection.

Aligned to the pay revision for the public servants, the Ministry of Industry, Commerce, and Employment with the World Bank is currently studying to increase the national minimum wage. The government pledged to increase the national daily minimum wage to Nu 450 from Nu 125.  The national minimum wage was first established in 2011 with Nu 100 per day, and it was further revised to Nu 125 per day in 2014.

Minister of Ministry of Industry, Commerce, and Employment, Karma Dorji said that work is under progress and any decision will depend on the World Bank’s technical assistance.