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Affirmative growth but likely trade imbalance, projects RMA

The Royal Monetary Authority has projected the country’s economy to grow by 8.2 percent in the next  three years.

In financial terms long-term is above three years, medium-term to a period between one and three years, and short-term below a year.

This is taking into consideration the full commissioning of Mangdechhu Hydropower Project in the fiscal year 2018/19.

The central bank’s monetary statement policy also highlighted that the sectors including agriculture, manufacturing and services are also expected to experience a moderate growth.

The construction sector is, however, expected to slowdown due to the near completion of ongoing major hydropower projects. The growth in manufacturing sector is expected to stimulate overall economic growth.

With full commissioning of Mangdechhu Hydropower Project ,  the RMA projects export to increase by 29.6 percent and this will be accompanied by subsequent fall in the hydro-related imports. As a result, the trade deficit is expected to improve at 7.9 percent of GDP, 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 an average, the current account deficit is projected to remain around 12.4 percent of GDP over the medium-term.

According to the National Budget Report for the FY 2018/19, a fiscal deficit of one percent of GDP is expected in 2017/18 and a fiscal surplus of 0.4 percent of GDP is projected for the 2018/19.

However, the RMA’s monetary policy statement stated the 2018/19 budget has been approved as an interim budget, where the capital budget has been only allocated for continuing and completing the spillover activities. “With implementation of 12th Plan, a fiscal deficit is expected to revert at 1.6 percent of GDP in 2019/20,” the report states.

The RMA stated that the current account deficit continues to pose challenges for the economy over the medium term, despite positive growth prospects.

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

Lower rigidities in the wages and subsequent hike in the recurrent expenditure of the government is also likely to further put upward inflationary pressure.

“Prudent fiscal management through tax reforms such as broadening of tax base, implementation of GST and calibrating an appropriate current and capital expenditures with the matching resources would be critical in order to keep pace with the GDP growth trend,” the RMA recommended.

The RMA also stated that official inflows in the form of capital transfers and external loans of the government are expected to continue to finance the current account deficit. However, the net surplus in the capital and financial account are anticipated to be slightly larger than the current account deficit. This would result in a gradual built up of reserves over the medium-term.

Although there is an ongoing effort to promote access to finance in priority sectors, the credit to private sector is expected to remain at a moderate level, averaging about 44 percent of GDP over the medium term.

As far as the credit to private sector is concerned, the ongoing efforts to promote access to finance in the priority sector is estimated to remain at a moderate level, averaging 44 percent in the medium term.

“The small market size, low economies of scale, technological constraints and relatively lower productivity are some of challenges that requires close attention,” the RMA stated in its report. “Harnessing the potential comparative advantage of domestic niche market and natural endowment with the focus on the CSI sector remains as an alternative choice for promoting development of the real economy.”

Success of addressing these challenges, the report stated, depends on the degree of cross-sectoral interventions and concerted efforts.

In the context of the RMA’s new market-based monetary policy operating framework, a well-coordinated and balancing efforts from both the government and the private sector is deemed critical.

Tshering Dorji

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