The Economic Stimulus Plan (ESP) is anticipated to aid Bhutan’s economic recovery by increasing capital expenditure under the forthcoming five-year grant, as highlighted by the International Monetary Fund (IMF). However, the IMF underscores the necessity for financial institutions to maintain strong underwriting standards, as they will carry the associated risks.
According to the IMF, during the first half of this year, most Asian economies surpassed the growth projections outlined by the IMF in its April 2024 regional economic outlook. The region as a whole benefited from robust global demand for Asian exports. Further, Bhutan’s economy is expected to improve alongside India’s economic growth, creating an optimistic outlook for regional development.
Akihiko Yoshida, Director of the Regional Office for Asia and the Pacific at the IMF, stated that economic recovery is expected to bolster capital spending under the upcoming five-year grant. He noted that the slowdown in immigration pull factors has reduced the labor force, particularly skilled workers, making the ESP loan program crucial for providing subsidized loans to specific sectors. “This should contribute to stronger growth in these sectors, provided financial institutions maintain strong underwriting standards, as they will bear the associated risk,” he added.
Bhutan will also need to implement fiscal measures and adjustments to build a solid fiscal buffer and rebuild its economy.
Regarding fiscal measures or adjustments, the Director stated that the authorities’ revenue mobilization strategy, combined with some restraint in current spending, will assist Bhutan in rebuilding fiscal buffers and creating fiscal space for priority expenditures, including infrastructure and key sectors like health and education.
“The cornerstone of the revenue mobilization efforts is the implementation of the goods and services tax, which is expected by July 2025,” the Director said.
Meanwhile, Krishna Srinivasan, Director of the Asia and Pacific Department (APD) at the IMF, stated that in the first half of this year, most Asian economies exceeded the growth forecasts made in the April 2024 regional economic outlook.
The entire region benefited from strong global demand for Asian exports. However, the picture for domestic demand was more nuanced. Some advanced economies outside Japan experienced a slowdown in household consumption, which may reflect the impact of early monetary tightening.
On inflation, the outlook is positive. Asia has reduced inflation to low and stable rates more quickly than other regions. In emerging Asia, the disinflation process was essentially complete by the end of 2023. For this year, the IMF expects the lowest inflation rate in nearly 25 years.
In advanced Asia, progress has been slower. Through mid-2024, wage pressures kept services inflation high, often reflecting efforts by workers to recover real income losses experienced from 2021 to 2023. However, in recent months, service inflation has started to decline, and most advanced economies are now returning to policy targets.
Asia continues to be the world’s engine of growth, generating 60 percent of global economic growth, significantly more than its approximately 40 percent share of global GDP. In Australia, the economy is managing persistent services inflation and maintaining a tight monetary policy. Consequently, the growth projection for this year has been revised downward.
Growth in ASEAN economies remains robust and balanced, despite significant differences between individual countries.
Finally, Pacific island countries are seeing a boost from the recovery in tourism, although this impact is expected to diminish by 2025.
Concerning risks, the environment for Asian policymakers has become increasingly challenging. For instance, there are initial signs that global demand could weaken, including in the United States, which would be detrimental for an export-dependent region like Asia.
Moreover, countries worldwide continue to implement trade restrictions at a rapid pace, leading to noticeable adjustments in trade flows. For example, China now exports relatively more to emerging markets and less to advanced economies than it did five years ago.
In such an environment, policy makers should ensure that in terms of macroeconomic policy, there is a strong case for rebalancing both fiscal and monetary stances. In many countries, the fiscal stance is excessively loose.
Meanwhile, public debt has increased significantly during the pandemic. In Pacific Island countries, for instance, debt ratios nearly doubled and have hardly decreased since then. This increase drives up debt servicing costs and leaves governments with limited flexibility.
In some economies, weak private demand may justify moderately larger fiscal deficits in the short term. However, for most countries, it is time to consolidate budgets rigorously to build buffers against risks and preserve resources for addressing long-term challenges such as climate change and population aging.
Conversely, with inflation largely under control, most Asian central banks now have room to cut interest rates. Earlier this year, some central banks were hesitant to ease rates before the Federal Reserve did, out of concern that it could place pressure on Asian currencies. However, now that the Fed has initiated its own rate-cutting cycle, these concerns should be alleviated.
Recently, several Asian economies have begun shifting more toward services rather than manufacturing. This trend is expected to continue as many Asian nations reach income levels where the demand for manufactured goods typically declines, and demand for services rises.
This transition to a service-based economy has been beneficial for growth, as modern services often have higher productivity than manufacturing. Additionally, digital technology has made certain services, such as business and finance, more tradable in global markets.
The emerging global market for services presents significant growth opportunities, but achieving these will require reforms. For instance, education and training systems must be adapted to equip workers with the skills needed for modern service provision. Furthermore, Asia should consider opening its service sector to trade and investment, as it remains relatively closed compared to manufacturing.
Bhutan’s Nu. 15 Billion ESP intends to accelerate economic recovery following the COVID-19 pandemic. The programme aims to enhance domestic production, reduce youth unemployment, improve foreign currency reserves, increase new business ventures, and revive the tourism industry.
The first tranche of Nu 2.5 Billion was released by the Government of India to the Royal Government of Bhutan in May 2024. This tranche has been allocated to various sectors, including agriculture and livestock development, creative industry, tourism development, and the De-Suung Skilling Programme. Several initiatives are already in progress, such as the Price Guarantee Scheme for priority crops and livestock products.
Another key initiative under the ESP is the Concessional Credit Line, launched on August 7, 2024, in Thimphu. Offering collateral-free loans at a 4% interest rate, it targets new and expanding ventures in agriculture, livestock, small industries, and manufacturing. The programme also includes a Reinvigoration Fund, which provides interest subsidies to help distressed businesses recover from the pandemic. Applications for this fund are open until December 31, 2024.
Sangay Rabten from Thimphu
