Credit access to be addressed through the forthcoming ESP

Experts say Bhutan should diversify exports to reduce tariff

The Ministry of Finance (MoF) has estimated the country’s balance of payment (BoP) for the Fiscal Year (FY) 2023-2024 at Nu 29.08 billion (B) and Nu 8.13B for the FY 2024-2025. According to the Ministry, the external sector of Bhutan has registered an overall deficit of about Nu 29B in FY 2022-2023 as per the provisional data. The gross international reserve at the end of the FY was USD 573.6 million (M). Meanwhile, experts from the Asian Development Bank (ADB) have called for studies to diversify exports and increase the number of tourists visiting Bhutan.

In addition, the Ministry has stated that for the FY 2022-2023, the gross international reserve was sufficient to finance 14.8 months of essential imports. However, in the FY 2023-24, the overall deficit is further estimated to widen to about Nu 29,08B, raising concerns regarding the sufficiency of the reserve requirements mandated by the constitution.

On concerns regarding the sufficiency of the reserve, Country Director (CD), Shamit Chakravarti, Bhutan Resident Mission (BHRM), Asian Development Bank (ADB), said. “The reduced reserve will depend on many factors where it is also important for the central bank of the country to look through the reason behind the decreased reserves and how to solve the reduced reserve.”

The Country Director said that one measure to address the challenges is to increase revenue from tourism, and also to look through the export baskets of the country, which is currently limited. “Aside from export of hydrogen power, ferro alloys, minerals, boulders, amongst others, to India, the country doesn’t export much to other countries; there can be done a proper study done to export to countries other than India, and also to study value chain and supply chain analysis,” he said.

Similarly, Sonam Lhuendup, an Economist with ADB said, “The study of the balance of payments of the country is something that is more technical where one should be familiar with the compositions including capital account, current account, and balance of trade, amongst others, which needs a thorough investigation.”

Sonam said, that with the decreased revenue from the export of hydropower, increased imports and decreased exports, amongst others, there are several factors impacting the balance of payments and that the government needs to study for way forwards.”

Similarly, another financial expert says it is important to review and adjust reserve requirements mandated by the constitution and adjust based on the current economic situation.

The expert shared that the idea of increasing and collection of tax, is also one of the mechanisms to ease the concern on regard to reserve sufficiency keeping the tax reforms combat as per the country’s mandates, rules and regulations.

According to the Ministry of Finance, the current account balance (CAB) is anticipated to exhibit a noteworthy improvement from 29.9% of Gross Domestic Product (GDP) in FY 2022-2023 to 21.8 % of GDP in FY 2023-2024, resulting in a deficit of Nu 58.13B, largely driven by both  merchandise and service exports.

The current account balance is also estimated to further improve based on higher budgetary grant inflows, higher service and hydropower exports, remittances, and interest earnings, amongst others, according to the Ministry.

Similarly, in the merchandise trade, there is a notable improvement with the deficit improving from Nu 84.39B in 2022 to Nu 70.57B in 2023, according to the provisional data of the Ministry.

The improvement is mainly attributed to an improved account of reduced imports from Countries Other Than India (CoTI), encompassing commodities such as machinery worth Nu 7.9B, vehicles worth Nu 888M, mineral products worth Nu 926M, and pharmaceutical products worth Nu 626M.

Meanwhile, the capital and financial accounts excluding net errors and omissions are estimated to decrease to Nu 29.08B in FY 2023-2024, as compared to the Nu 34.09B recorded in the previous FY. The decrease is primarily attributed to the capital account, which experienced a decline of 37%, equivalent to Nu 3.40 billion, due to reduced inflows for both budgetary and hydropower investments.

However, the capital account is estimated to improve with the grant’s disbursement in the 13th Five Year Plan (FYP) and the construction of new hydropower projects, the Ministry stated.

Meanwhile, the financial account is estimated to experience a decline of Nu 1.60 billion in FY 2023-2024. However, it is expected to see an increase in the near term, driven by higher investment inflow estimates and ongoing as well as pipeline loans, including both hydro and non-hydro projects.

By Sherab Dorji, Thimphu