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A vibrant monetary sector

The year of the dog marked the end of the 11th Plan and beginning of the 12th Plan.

From the economic perspective, the dog was loyal. It inherited the growth, maintained it quite well, and passed it on to the hog. From about 7 percent in the previous year, 2018 witnessed economic growth rate of more than 6 percent.

However, the dog year was not propitious for the horse (PDP government) as the former government failed to achieve a hefty target of 15 percent GDP growth on an average in the 11th Plan in 2018. The year also saw World Bank downscale its projections because of the delay in commissioning of the hydropower projects.

The dog year also witnessed the biggest budget injection of Nu 56B in the final year of the 11th Plan, which entailed huge investment from the government to make up for GDP growth. The GDP expansion was mainly driven by strong performance of service, construction, and industry sectors.

On the fiscal front, despite the decline in the collection of sales tax, changes in personal income tax, the domestic revenue collected was Nu 36.17B due to increase in the Corporate Income Tax (CIT) collection, Excise Duty Refund (EDR) from India, and customs tax.

However, with the implementation of the GST in India, 2018 saw the last lot of Excise duty refund from India and subsequent decline in imports from India by 2.4 percent.

The fiscal year 2018-19 was a special year as government’s tenure completed in August and the 12th Plan began. Budget discussion in the 11th session of the Second Parliament took unusual turn when the government decided to approve the budget for the entire fiscal year. The Opposition, however, objected saying that was the new government’s prerogative. This resulted in an interim budget, which included the current expenditure for the entire year and capital budget for six months.

When the government revealed a detailed fiscal incentive report, former minister, Yeshey Zimba, was accused of policy corruption because Bhutan Hotels Ltd., which belonged to the minister’s daughter, was found to be biggest beneficiary of the fiscal incentive. The government had foregone a total of Nu 10B in the last five years in granting fiscal incentives.

The year 2018 saw record low inflation of less than four percent.

On the external sector, trade deficit improved slightly. However, the debt to GDP ratio hit 108 percent. Domestic credit rose to more than Nu 108B.

Trade statistics showed a serious food trade deficit. Bhutan imported food commodities twice the value of export in the three quarters of 2018. The country experienced food trade deficit of Nu 5.2B in 2013 as she imported essential food items worth Nu 6.3B in 2013, including Nu 1.5B worth of rice.

Bhutan’s ease of doing business ranking slipped despite reforms despite government’s pledge to take the country’s ranking to the top 50. The World Bank’s ease of doing business report placed Bhutan at 81st position, down from 73.

The monetary sector was lively in 2018. The central bank went all out to take the priority sector lending nationwide. As of September this year, the dzongkhags have received 1,161 applications and the financial institutions have sanctioned a total of Nu 233M PSL loan. The first PSL taker went on to liquidate his loan as the dog year came to an end.

The year also saw central bank come up with various monetary policies. NGOs like Loden, BAoWE, and REDCL became a fully-fledged microfinance institutes and with the launch of a software platform, Druk MicroFin, the way forward is paved.

After finalizing regulation on private money lending, 2018 saw first registered private moneylender in the country.

Remit Bhutan touched reached USD 3.5M mark by May last year and the foreign exchange counter in the Paro airport saw remittance amount hit USD 2M. Further, the INR exchange counter in the border gate of Phuentsholing gathered Nu 500,000 on daily basis. Efforts were made to supplement the country’s reserve. Rupee reserve was well above the mark reaching Rs 20B in June 2018.

As the dog year settled, digital financing took a whole new turn when the central bank announced that financial switches of India and Bhutan would be integrated, allowing the use of Rupay card to both Indian visitors and Bhutanese travelling to India.

The outlook

International Monetary Fund has projected the country’s GDP growth to decelerate to 4.8 percent in 2019. However, a moderated growth is expected with the operation of the Mangdechhu Hydropower Project to about six percent in the 2019-20 fiscal year.

Given Bhutan’s infrastructure needs, higher capital expenditure supported by additional domestic revenue and a modest increase in domestic financing is found to be critically important. The government has committed to implement a broad-based GST by July 2020 and cut tax exemptions.

On the positive note, IMF expects the country’s current account balance and reserve coverage to improve due to a decline in hydropower-related imports and sharp increase in hydropower exports.

RMA, in the meanwhile, has projected the country’s economy to grow by 8.2 percent in the next three years. With full operation of Mangdechhu Hydropower Project, RMA projects export to increase by 29.6 percent, accompanied by subsequent fall in the hydro-related imports.

As a result, the trade deficit is expected to improve, leading to softening of current account deficit from 21.8 percent in fiscal year 2017/18 to 14.3 percent in fiscal year 2018/19. On average, the current account deficit is projected to remain around 12.4 percent of GDP over the medium-term.

Given the domestic supply constraints and import dependency, the rising per-capita income and consumption demand are likely to deteriorate trade imbalances, exerting pressure on international reserves and exchange rate arrangement in the long run.

Lower rigidity in the wages and subsequent hike in the recurrent expenditure of the government are likely to put upward inflationary pressure.

Tshering Dorji

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