Following the visit of a mission from the International Monetary Fund (IMF) to Bhutan in the first week of June this year, a policy discussion paper released by the mission advocates for fiscal and monetary adjustment to reduce imbalances, and rebuild buffers. The paper was released from Washington, DC, on 19th September, 2024.
Discussions centered on how the peg to the Indian rupee has served the country well given close trade linkages with India and provided a nominal anchor. To support the peg, IMF has recommended that policies that need to focus on addressing external and domestic imbalances and gradually rebuilding policy buffers.
The IMF has pointed out that a revenue-based fiscal consolidation would allow a decline in non-hydro debt and limit the increase in total public debt. The envisaged implementation of the Goods and Services Tax (GST) has been called as a cornerstone of such efforts. However, IMF has said that this should be complemented with additional permanent revenue measures amounting to around 1 % of GDP over the 13th Five Year Plan (FYP).
Included in the recommendations is a downward trajectory for non-hydro debt, which IMF has said could serve as a fiscal anchor over the medium term. Supported by tighter monetary policy, it would allow for an easing of import restrictions while contributing to a faster buildup of reserves. These efforts would result in additional policy space which would prove handy if downside risks materialize.
The IMF has pointed that the fiscal deficit narrowed but remained high and non-hydro debt nearly doubled from pre-pandemic levels. It has said that the current account deficit (CAD) is expected to narrow, supported by higher electricity exports due to the commissioning of new hydropower plants and a continued recovery in tourism, amongst others.
It has recommended that a faster fiscal consolidation pace, including revenue mobilization efforts as well as spending restraint, would be appropriate. Measures should include implementing the GST by July 2025 as currently envisaged, improving tax administration, restraining the wage bill, and improving spending efficiency.
It has also called for tightening monetary policy to support the fiscal consolidation and rebuild external buffers. In terms of structural reforms, IMF has said that the challenge is to generate high-quality jobs and diversify the economy. The need of an improved business environment to address these challenges has been underlined, including enhancing governance and transparency in the public sector.
The IMF has stated that Bhutan had achieved significant improvements in social conditions during the last decade, raising living standards. Poverty and inequality have declined, while extreme poverty has been eliminated.
However, the pandemic hindered economic development, and external shocks and domestic policies have prevented a more robust recovery and resulted in large external imbalances leading to a sharp decline in reserves and placing pressure on the exchange rate peg.
Meanwhile, the team that visited Bhutan has stressed the need to further strengthen public sector governance, including the Royal Monetary Authority’s (RMA) governance framework and independence as well as the transparency in the operations of state-owned enterprises. They have welcomed RMA’s efforts to strengthen its reserve management strategy.
The paper includes statements of Krishnamurthy Subramanian, Executive Director for Bhutan, and Anand Singh, Senior Advisor to Executive Director, who have said that the domestic liquidity management framework is geared up to address the dissipation of pandemic liquidity buildup.
They have also stated that the Bhutanese authorities are open to adding a proposed monetary policy operation to the existing weekly liquidity management operation. This policy interest rate corridor would allow RMA to align short-term money market rates at a level needed to achieve price stability and support the peg. The IMF’s technical support would help authorities further validate the proposed policy rate and implementations (open market operations and determining the haircut for eligible securities).
The IMF Executive Board concluded the Article IV Consultation with Bhutan on 9th September, 2024.
The staff team who visited Bhutan in June comprised Enrique Flores Curiel (head), Cristian Alonso, Dinar Prihardini and Ranil Salgado (resident representative, all APD). Mr Anand Singh (OED) joined the concluding meetings. Tommy Lee and Anggia Sinjar (both APD) assisted the team.
By Sangay Rabten, Thimphu
