IMF concerned about overall macroeconomic situation in Bhutan

In a question asked by the paper on the new government’s economic stimulus plan, Director of the International Monetary Fund’s Asia and Pacific Department, Krishna Srinivasan Asia said he would not be in a position to comment as he is not aware of the details concerning the stimulus plan. However, he said that Bhutan requires adjustment on the fiscal side, together with longer-term reforms and longer term fiscal reforms, which can put the economy back on a more strong and durable path.

One of the core pledges of the newly elected People’s Democratic Party (PDP) government is the Nu 15 billion (B) Economic Stimulus Plan (ESP). Although Business Bhutan sought whether the budget will be sufficient and if the plan is right to revive the economy, the Director of IMF’s Asia and Pacific Department, Krishna Srinivasan said that it is difficult to comment right now.

However, during the same on-line press conference on the Regional Economic Outlook, the Director said, “IMF had some concerns about the overall macro situation in Bhutan, both in terms of the fiscal and in terms of the external position. And it requires both adjustment on the fiscal side but more longer-term reforms, longer term fiscal reforms, which can put the economy back on a more strong and durable path.”

The Director added, “So it would be very hard to say whether this stimulus is right. I need to know the details. I don’t have the details in front of me, but I would say that at least what I’ve seen over the past six months is that we are concerned with some of the macro fundamentals, including the fiscal and so on. So there’s not much by way of room to provide greater stimulus.”

He went on to say that for 2023, IMF estimates a growth rate of 4.7%, compared to 4.6% projection in October.

China and India account for most of the upward revision. In China, growth was supported by higher spending on disaster reconstruction and resilience projects. In India, strong domestic demand underpinned another increase in the growth estimate.

“We have also upgraded our regional growth forecast for 2024 to 4.5%, from 4.2% in October. Overall, Asia is on-track to deliver again two-thirds to global growth in 2024, as it did in 2023.”

The regional average, however, hides significant divergence between countries. In Japan, the IMF expects growth to remain above potential but to slow from about 2% in 2023 to about 1% in 2024, as one-off factors that supported activity last year fade—including a depreciated yen, strong tourism, and a recovery in business investment. Growth in India, on the other hand, is expected to remain strong at 6.5% in both 2024 and 2025.

“For 2025, we project growth in the region to decelerate mildly to 4.3%, reflecting to a large extent China’s growth slowdown. On inflation, the news has also been mostly positive, which improves the prospects for a soft landing,” the Director said.

Taking half a step back, the Director said that in Asia, post-COVID price pressures were, on average, less intense than elsewhere to begin with. They are now receding rapidly. IMF estimates that average Asian inflation fell from 3.8% in 2022 to 2.6% in 2023, with particularly swift progress in emerging Asian economies. Many regional central banks are on course to reach their inflation targets in 2024. Provided policymakers hold steady until inflation is firmly re-anchored, scope for monetary easing may emerge later in the year.

Again, the picture across Asia is not uniform. In China, inflation was only 0.3% in 2023, fueling concerns about deflation. The weakness reflects mainly lower food and energy prices but also subdued core inflation. Inflation is expected to recover gradually through 2025. In Japan, the IMF expects inflation to slow from 3.2% in 2023, but to remain above the 2% inflation target until 2025.

The relatively benign inflation environment had unexpected side effects in 2023. With less price pressures to combat, Asian central banks needed to increase interest by less than their counterparts elsewhere. Hence, in the second half of 2023, the U.S. Federal Fund’s rate exceeded the average policy rate in Emerging Asia—an unusual constellation that triggered depreciation pressures on Asian currencies in the fall of 2023.

Now what should policymakers prioritize? IMF say this is the time to strengthen the resilience of Asia’s economies.

Fiscal consolidation is key to restoring buffers and safeguarding debt sustainability. In 2023, budgetary balances improved somewhat in Asia, but consolidation was slower than anticipated. So, more belt-tightening will be needed.

Strong financial supervision and systemic risk monitoring is needed to safeguard against potential financial sector vulnerabilities. Structural reforms remain imperative to boost productivity and mitigate challenges from global de-risking, while accelerating the green transition is essential for sustainable growth.

Sangay Rabten from Thimphu