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By Gopal Sharma and Manoj Kumar
KATHMANDU/NEW DELHI (Reuters) - Rising fuel import costs and global grain shortages have led to a spike in domestic prices, posing a risk of food scarcity for people in Bhutan, especially in the rural areas, economic affairs minister Loknath Sharma told Reuters on Thursday.
Bhutan, with a population of less than 800,000, is confronting the impact of Ukraine war - which has caused a spike in global crude oil and grain prices - after its economy initially began to recover as pandemic restrictions eased.
"Scarcity of food commodities could fuel inflation higher," Sharma told Reuters, adding the government was worried about the impact of export restrictions on grains by some countries, though he did not name them.
Bhutan, which depends on imports to meet food demand, imported cereals amounting $30.35 million, mainly rice and wheat from India, in 2021.
Local industry leaders said recent restrictions imposed by India on wheat exports have stoked worries of a further rise in local prices, though New Delhi has said it would continue exports to vulnerable and neighbouring countries.
Sangay Dorji, secretary-general of Bhutan Chambers of Commerce and Industry said higher food prices would hurt the local economy: "We are deeply concerned about food supplies... after fuel inflation, this will worsen the situation."
A strict zero-COVID policy and vaccination of over 90% of the population has hurt economic growth in Bhutan, nestled between China and India, including by stoking inflation and curbing the inflow of tourists, a World Bank report said last month.
The $3 billion economy contracted for two years - by 3.7% in the 2020/21 fiscal year ended in July and by 2.4% in the previous year - pushing more people into poverty.
Those at the poverty level, measured at $3.20 earned daily per person - rose to 12.6% of the total population in 2021 from 11% in 2019, the report said, noting the economy is expected to grow 4.4% in the current fiscal year, with downside risks.
"About 29% of households are still worried about running out of food. Of these, almost half curtailed food consumption as a precautionary measure," the report said, adding that those in rural areas were more likely to eat fewer meals or skip them.
Bhutan's inflation was projected to remain in line with that of India, which rose to an eight-year high of 7.8% in April, given its currency Ngultrum's peg to India's rupee, and dependence on imports, the International Monetary Fund said on Tuesday after its annual review of the economy.
Retail inflation could remain elevated after rising 8.2% in the previous 2020/21 year, it said, driven by food prices.
The government hiked retail petrol and diesel prices last week for the second time in a fortnight, worried over the impact of rising oil imports - touching 8.35 billion Bhutanese Ngultrum ($107.63 million) in 2021.
Sharma said the country's economic fundamentals were strong and it had adequate foreign exchange reserves of about $1.4 billion - enough for about 12 months of imports.
($1 = 77.5782 ngultrums)
(Writing by Manoj Kumar; Editing by Bernadette Baum)