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Living on borrowing

A sign of a strong economy, economists agree, is a high value of domestic credit, especially to the private sector. Going by this, our economy is on the right track.

In just one year, the economy saw domestic credit, availed from our financial institutions (FIs), increase by Nu 12B. As of June this year, the FIs has injected 107.8B in the economy. The increase is welcomed keeping in mind the central bank’s drive to fuel domestic credit to almost 50 percent of the GDP in the medium term. 

However, as we get a better understanding of the economics of our borrowings, we begin to see some risks too. If at the national level our overall GDP growth is boosted by grants and loans, the income generated by our own resources is limited indicating that our growth, is not really a real growth.

In this context, the increase in domestic credit too is not all about appreciations. Dependent on import, growth in domestic credit directly impacts the already gapping current account deficit. Basic economics tells us that growth should be followed by job creation and import substitution, in our case. 

This is not happening as much as we expected even with the government identifying priority sectors. More than 23 percent of the credit was to the construction sector. Loan availed for building and construction has reached 25B, almost a fourth of the total lending. Banks will lend to this sector, but returns are guaranteed with mortgages. And we are still complaining of soaring house rents.

From experience, we know that lending to this sector could hurt the economy through huge imports and draining our Rupee reserve. 

If we have forgotten,  it is good to remind ourselves that  it was not long ago when we had to resort to loan and import restriction to curb the deficit. Even after recognizing that credits should be diverted towards sectors that could boost domestic production, substitute imports and create jobs, such sectors are languishing in the dark.

Lending in the agriculture sector, which employs more than half the workforce, saw an increase of only Nu 0.6B in one year. This is after a lot of political rhetoric on the importance of the sector to reduce dependence on import and achieve food self-sufficiency. 

Even as we are overwhelmed with the increasing number of vehicles, loan in the transportation sector has increased by Nu 1.5B in one year. The central bank had intervened, but our banks and customers fine-tune their tricks to lend and borrow. What we don’t need today, from looking at our roads, is loans to encourage people buy cars. On the contrary, we see innovative initiatives and flexible loans to increase sale of cars and encourage buying.

A financial expert, at a financial literacy discussion, said Bhutanese cannot get over with the habit of borrowing while not knowing to save. There is also a growing number of young Bhutanese having to borrow because we are not living within our means.

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