Monetary, fiscal and external sectors to grow as economic activities normalize

Credit to the private sector is estimated to rise to 10.9% in 2022, as per the State of the Nation report

Under macroeconomic performance, monetary, fiscal and external sectors are expected to grow as economic activities normalize in the next fiscal year and if the government boosts the investments in the private sector, according to the State of the Nation report.

However, the growth in money supply in the coming fiscal year is expected to be lower at 14.4% due to the decline in net foreign assets. Credit to the private sector is estimated to increase from 6.9% to 10.9% in 2021-22.

Despite the economic slowdown, the growth in money supply has been maintained at 24.5%, which is supported by an increase in both net foreign assets and net domestic assets, according to the report.

“On the other hand, net foreign assets continue to drive the money supply growth and are attributable to increased inflow of foreign grants, hydropower receipts, and lower import payments during this fiscal year,” states the report.

 According to the report, with close to a 9% decline, the Non-Performing Loans (NPLs) have come down from Nu 26.5bn in June 2020 to Nu 24.2bn in 2021.The NPLs are mainly concentrated in the service/tourism, trade/commerce, and production and manufacturing sectors with a share of 29%, 19%, and 19% respectively.

As of October this year, total liquidity in the financial sector, it was mentioned in the report, stood at Nu 34.4bn and that the implementation of various monetary measures has contributed to providing an undisrupted flow of liquidity in the financial sector.

Fiscal sector

Meanwhile, the report showed that the total resources mobilized in fiscal year 2020-21 was Nu 59.7bn, of which 60% was domestic and the remaining was from grants and other receipts.

“While the domestic revenue mobilized amounting to Nu 35.8bn exceeded the target by 8%, it was 1% dip compared to the fiscal year 2019- 20. Profit transfer of Nu 7.3bn from the Mangdechhu Hydropower Project brought about a significant offset,” states the report.

According to the report, to ensure a certain level of continuity in the economy despite setbacks imposed by the pandemic, current expenditure was contained within the limited resources, whereas capital expenditure increased by 25%.

As a result, the fiscal deficit stands at 6.3% of the GDP. Besides external borrowings, the report stated that the capital works were financed mainly through domestic borrowings that included issuance of first-time government bonds and treasury bills.

In the medium term, the fiscal deficit is projected to remain elevated as non-hydro revenues remain subdued, states the report. On the other hand, the government continues to spend more to boost economic activities and ensure continuity in development projects.

As a result, the report mentioned that the financing requirement will increase, and as external borrowings depend on the agreement framework with multilateral development banks, the deficit needs to be largely financed through the domestic market.

External sector

On the external front, because of the reduced demand for export and import, the current account deficit in fiscal year 2020-21 narrowed to 11.8% compared to 12.4% of the GDP in fiscal year 2019-20, according to the report.

As of September 2021, the total goods exports increased by 76% and imports increased by 31% compared to the same period of the previous year.

For instance, non-hydro exports to India increased by 77% and imports by 38%. Therefore, the non-hydro export in 2021 is projected to increase by 51% compared to 2020 while the hydro export to India is expected to drop by 15%.

Similarly, the total imports in 2021 are expected to increase by 22.8% as economic activities normalize.

“The overall trade deficit, therefore, is projected to widen in 2021. The current account deficit is expected to be adequately covered by financial and capital flows as hydropower disbursement and budgetary grants continue, which could result in an overall balance of payment of 7.6% of the GDP during the current fiscal year,” states the report.

The report also mentioned that the Gross International reserves at the end of fiscal year 2020-21 stood at US$ 1.5bn, which was adequate to meet 28 months of essential imports.

Kinley Yonten from Thimphu