1.2 Rising global commodity prices pushing up inflation

ResHAPIng noRms: A new wAY FoRwARd

currency threaten to delay the import of raw materials required for export production. The war in Ukraine can also reduce its tea exports, as Russia is the second largest buyer of Ceylon Tea.

While countries’ goods exports have increased above the pre-pandemic level in recent months (Figure 1.2.A), exports as a share of global exports have stayed around pre-pandemic levels. As global commodity prices rise in 2021, goods exports have been fueled by rising prices. As a result, the rise in global merchandise exports value has far surpassed the rise in exports volume (Figure 1.9.A). By the end of 2021, the nominal global goods exports reached 20 percent above its level in January 2019, while the volume is only 5 percent above the pre-pandemic level. The same is true for South Asian countries as a whole. In the absence of reliable high-frequency trade volume data for most countries, we normalize countries’ goods exports using the global level. Figure 1.9.B shows that the normalized goods exports have stagnated in recent months, with the shares out of global goods exports hovering around their pre-pandemic levels. This suggests that the recent stellar performance in goods exports is mostly driven by rising prices worldwide, and much needs to be done to secure the region’s growth in exports volume, especially facing external headwinds including the war.

1.2 Rising global commodity prices pushing up inflation

Even before the war, domestic prices of food and energy-related items increased rapidly. Driven by rising global energy prices since the second half of 2021, inflation rates in most energy-related goods (for example, fuel for utilities, transport) are much higher than the headline inflation in Bangladesh, India, Nepal, and Pakistan for the months from November 2021 to January 2022 (Figure 1.11). Base effect contributes in part to the higher energy inflation, as energy prices were relatively low around the same time a year ago due to the COVID shock. But even the two-year compound annual growth rates (CAGRs) in energy prices are at double digits. Food prices have remained elevated. In particular, the prices of edible oils have been rising sharply. In Bangladesh, India, Nepal, and Pakistan, inflation in edible oils reached over 20 percent in late 2021.3 Although targeted policy interventions in Bangladesh and India have helped reduce edible oil inflation a bit in recent months (Section 1.5), it remains in the double digits. Even in Maldives, where headline inflation has been below 1 percent since

3 To capture inflation in edible oils, the CPI category “edible oils & fats” is used for Bangladesh, India and Maldives; categories “mustard oil,” “cooking oil,” and “vegetable ghee” are used for Pakistan; and category “ghee & oil” is used for Nepal, which includes ghee, mustard oil, soybean oil, and sunflower oil.