Bhutan: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
01 Jul 2014
eISBN:
9781498357708
ISBN:
9781498357708
Language:
English
Keywords:
ISCR; CR; credit growth; private sector credit; exchange rate; foreign exchange; Indian rupee; fiscal policy; broad money; Inflation; Credit; Imports; Exports; Global
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This 2014 Article IV Consultation highlights that the GDP growth in Bhutan has slowed from about 10 percent in FY2011 (July 1–June 30) to 5 percent in FY2013. Slower growth reflects policy efforts to contain overheating pressures in the form of restrictions on credit for construction and vehicle. Inflation has remained elevated, tracking closely that of India (Bhutan’s main trading partner). Social development indicators have improved steadily, and Bhutan is on track or has achieved most of its Millennium Development Goals. Growth is projected to recover to 6½ percent in FY2014, driven mainly by a pick-up in hydropower-related construction activities and domestic services.

Abstract

This 2014 Article IV Consultation highlights that the GDP growth in Bhutan has slowed from about 10 percent in FY2011 (July 1–June 30) to 5 percent in FY2013. Slower growth reflects policy efforts to contain overheating pressures in the form of restrictions on credit for construction and vehicle. Inflation has remained elevated, tracking closely that of India (Bhutan’s main trading partner). Social development indicators have improved steadily, and Bhutan is on track or has achieved most of its Millennium Development Goals. Growth is projected to recover to 6½ percent in FY2014, driven mainly by a pick-up in hydropower-related construction activities and domestic services.

Introduction

1. Significant economic and social gains have been realized during the Tenth Five Year Plan (spanning 2008/09–2012/13). Against the background of strong implementation, robust donor support, and increased hydropower generation capacity over the 10th Five Year Plan (FYP), there has been a steady increase in per capita incomes to middle-income levels and substantial reduction in poverty, along with marked improvement in social indicators. Bhutan has attained or is on track to achieve most of the MDGs. Additionally, Bhutan has pioneered a unique development approach based on the concept of Gross National Happiness (Box 1). Bhutan has also enjoyed political stability, with elections and a smooth political transition taking place in mid 2013.

Table. Poverty and Social Indicators, Bhutan

article image
Source: UN Publications, UNDP, World Bank, Bhutan National Statistics Bureau

Bhutan Poverty Analysis, 2012

Percent of school age population

World Human development index: 0.69; Global ranking: 140

2. Notwithstanding these successes, Bhutan faces growing external imbalances. Rapid growthwas accompanied by overheating pressures which resulted in a sharp widening of the current account deficit, in part due to substantial hydro-power related imports. External pressures have led to a recurrent shortfall in Indian rupee reserves. A comprehensive set of policies should be put in place to ensure that such pressures are minimized in future as Bhutan continues on its quest to raise growth and living standards through expansion of hydropower capacity.

3. The authorities’ macroeconomic policies and past Fund advice have been broadly aligned, but progress on fiscal consolidation and structural reforms have been slow. Consistent with Fund advice, important steps have been taken to improve the monetary transmission mechanism, to introduce macroprudential rules, and to actively manage reserves. However, the stance of fiscal policy has been looser than staff recommended in 2011 Article IV Consultation and is budgeted to remain high in FY2014. Also, progress on structural reforms has been limited.

Recent Economic Developments

4. GDP growth in Bhutan has been strong over the Tenth FYP, driven by the hydropower sector. However, growth is projected to have slowed to 5 percent in FY 20131 from over 10 percent in FY2011, due to policy efforts to moderate credit growth to contain overheating pressures. Restrictions on credit for construction and vehicle imports led to a decline in services sector growth, particularly in transport and financial services, as well as a decline in construction sector growth.

5. Inflation remains elevated above double digits, mostly reflecting price developments in India, given the peg to the Indian rupee2. Headline inflation reached 11.3 percent in December 2013, accelerating from 9.5 percent in December 2012. Inflation is projected to average above 10 percent in FY 2014, but should decline over the medium term in line with moderation in India’s inflation. Staff analysis has found that inflation in Bhutan is closely related to Indian inflation (see Box 2).

6. The current account (CA) deficit remains sizable and is financed through substantial aid inflows. The CA deficit, reflecting large hydropower-related imports, widened to 22.8 percent of GDP in FY 2013 from 15 percent of GDP on average over the 10th FYP. In addition, hydro-related auxiliary activities and a consumption and housing boom added to the rapid increase in non-hydropower imports. Nonetheless, robust aid inflows have led to a positive overall balance of payments position, enabling the continued accumulation of international reserves, which stood at US$ 933 million (over 10 months of import cover) in December 2013.

Outlook and Risks

7. Growth momentum is expected to pick up in the near term. Growth is projected to recover to 6½ percent in FY2014, rising to about 7½ percent in FY2015, driven mainly by a pick-up in hydropower-related construction and domestic services. In addition, policy measures to revive the economy, including a capital infusion in banks as part of an Economic Stimulus Package (ESP), are likely to exert a modest positive impact on growth. The CA deficit is projected to widen further to around 25 percent in FY 2014 due to stronger hydro-related imports.

8. The expansion of hydropower capacity over the medium-term poses challenges for macroeconomic management (see Box 3). Growth is projected to average 8½ percent over the course of the Eleventh FYP, boosted initially by the construction of hydropower facilities and then by electricity generation in later years. As a result, the CA deficit is projected to widen to more than 27 percent of GDP by FY2017. External financing should be monitored closely so that pressures on the overall balance of payments position remain contained. However, if this transition is well managed, per-capita incomes could double to around US$5,000 by FY2019.

9. Risks are firmly tilted to the downside. Risks stem from high debt levels and the possible surfacing of financial sector vulnerabilities following a prolonged period of rapid credit growth. There is also a risk of renewed external pressures, including pressures on rupee reserves, if macroeconomic policies remain expansionary and credit growth rebounds strongly. Additionally, risks emanate from a potential slower-than-expected recovery in India—including due to financial market volatility—though these risks are mitigated by the concentration of exports in the hydropower sector, which enjoys healthy demand from power-constrained India (see Box 4 for spillovers from India)3.

Policy Theme #1—Maintaining Macro-Economic Stability

The near-term challenge is to support growth while ensuring that macroeconomic stability is maintained and external pressures remain contained. Fiscal and monetary policies should be tightened and reserve management strengthened in the face of recurrent pressures on rupee reserves.

A. Fiscal Policy

Background

10. The fiscal deficit worsened sharply in FY2013 due to a shortfall in grants, and is budgeted to remain high in FY2014. The FY2013 fiscal deficit was revised to 4 percent of GDP, compared with the previous estimate of 1 percent, driven primarily by a shortfall in grants. The budget for FY2014 aims for a deficit of 3.6 percent, mainly on account of lower projected revenues and grants. In addition, an off-budget economic stimulus plan, financed by official grants from India, has been prepared in the amount of ngultrum 5 billion (about 4 percent of GDP) to be spent over 5 years, of which ngultrum 4 billion will be provided to banks in the form of subordinated debt and revolving funds to reinvigorate credit growth. Furthermore, the stimulus plan proposes subsidies of ngultrum 1 billion for education, free electricity, financial support for senior citizens, and unemployment benefits.

11. Over the medium term (corresponding to the Eleventh FYP), donor financing is projected to fall as per capita incomes rise. Accordingly, grants are expected to decline from 9 percent of GDP in 2012/13 to 6 percent by 2017/18. The impact of declining grants is expected to be mitigated by the increase in hydropower revenues as major projects currently under construction come on-stream in the outer years of the plan. The fiscal deficit is projected to be around 1 percent of GDP (on average) during the plan period4. The programs and financing of the Eleventh FYP were negotiated with the Government of India, which will provide Nu. 45 billion (or 21 percent of plan outlay) in the form of grants.

Staff Views

12. In the near term, fiscal policy should aim for consolidation to ensure that overheating pressures do not reemerge. Fiscal policy has generally been prudent in the past, but more recently, the fiscal stance has turned much more expansionary. Persistent large deficits, financed by domestic borrowing, risk crowding out the private sector and contributing to a buildup of public debt. Revenue reforms are essential, including reducing the number of zero-rated goods, simplifying the indirect tax rate structure, widening taxation of domestic activity, and improving tax administration (see Selected Issues Paper on “Options for Tax Reform”). Such reforms will reduce dependence on hydropower and on external aid, and will ameliorate revenue volatility. In addition, if there are further grant shortfalls, restraining spending while preserving social and productivity-enhancing expenditure will be appropriate. Further civil service wage hikes, unaccompanied by complementary revenue measures, would lead to deterioration of fiscal balances5. As well, the ESP risks stoking overheating pressures which could translate into external pressures.

12. Over the medium term, reforms should aim to place public finances on a more solid footing. As noted, over the span of the Eleventh FYP, donor financing is projected to fall as incomes rise. Caution is needed in the event of further delays in grant inflows and in the commissioning of the ongoing hydropower projects (which would lead to large revenue shortfalls in the outer years of plan). Given such potential eventualities, spending restraint and prioritization would be prudent to create the fiscal space for necessary development-related expenditure (on health and education) while avoiding a build-up of public debt. Consideration should be given to introducing a value-added tax to replace the existing system of indirect taxes, to boost revenue collection through a wider base and better enforcement.

A01ufig1
Sources: IMF, International Financial Statistics, Royal Monetary Authority of Bhutan, and IMF staff calculations.

13. There is a need to improve fiscal management, including strengthening cash management (on which Fund TA is being provided). Government cash balances are prone to sharp fluctuations due to erratic and volatile inflows, particularly grants, necessitating the maintenance of large precautionary balances. Moreover, domestic financial markets are shallow and underdeveloped, and treasury bills are not issued regularly enough to handle fiscal volatility. Thus, cash flow is both complicated to forecast and difficult to smooth with existing instruments. The issuance of treasury bills should be planned and based on a cash forecasting framework, as opposed to ad-hoc short-term borrowing. Over the medium term, the multi-year budget framework could be enhanced to enable the government to better mobilize donor support, along with coordinated development of a treasury bill market to both facilitate issuance and develop demand for treasury bills.

Authorities’ Views

14. The authorities broadly agreed with the need to maintain fiscal restraint, including through additional revenue-raising measures. The next Budget is expected to include a number of near-term tax measures to boost revenues, and a broader review of tax policy is envisaged in the medium term. Fiscal measures will also likely replace administrative measures restricting imports of vehicles and construction-related items. The authorities also recognized that fiscal room to implement pay hikes is limited, even as expectations of a pay hike have arisen with the appointment of the Pay Commission.

15. On the larger-than-expected fiscal deficit in FY2013, the authorities noted that larger domestic borrowing resulted from cash management needs as grants were delayed. They clarified that the ESP will be implemented to minimize risks to banks and the possible generation of excess aggregate demand. They clarified that banks will only serve as a conduit for financing, and will be free to advance loans on purely commercial basis as long as the loans meet the criteria of import substitution, export promotion, or employment promotion.

B. Monetary Policy

Background

16. The tight liquidity condition faced by the banking system in 2011 and 2012 have eased recently. Excess bank liquidity characterized the financial system from 2008 to early-2011 due to the accumulation of hydropower and non-hydro inflows (which were only partially sterilized). Tight liquidity conditions emerged in June 2011 (shortfall of Nu 1.1 bn or 1.5 percent of GDP) as a result of persistent growth in rupee imports with an equivalent drain on local currency liquidity; a reduction in retail deposits; over-dependence on more volatile and seasonal corporate and government deposits as a source of funding; and bank financing of large investment projects (e.g. Dungsam cement project). Responding to tight liquidity conditions, the Royal Monetary Authority (RMA) cut the cash reserve ratio (CRR) twice, banned construction and vehicle loans, relaxed the provisioning requirements, and suspended overnight sweeping of government accounts from the banks to the RMA, which eased liquidity. At present, banking sector liquidity is ample at around 10 percent of GDP.

17. The authorities have made some progress towards improving the monetary transmission mechanism. In March 2012, the RMA introduced a Short-Term Liquidity Adjustment Window (RSTLAW) for securitized RMA lending to banks at a newly-introduced policy rate which is linked to the RSTLAW facility. To further strengthen the transmission mechanism, a base rate system (below which lending is not viable for financial institutions) was introduced in order to influence credit growth, increase transparency of loan pricing, and foster lending discipline. The base rate could also serve as a reference benchmark for floating-rate loans. There remains a persistent negative interest rate differential with India.

18. Despite substantial financing requirements recently, the government has continued to rely on bank financing rather than Treasury bill issuance. First, the Ways and Means (W&M) account is available at the RMA up to a limit of 10 percent of average revenues over the last two years. Second, the overdraft facility with the largest commercial bank could be overdrawn without limit. As shown in the text figure, the government first utilizes the cheaper W&M account before making use of the overdraft. The issuance of Treasury bills (T-bills) has to a large extent been detached from financing requirements. Since December 2009, T- bills have rarely been issued for monetary policy purposes, nor are they being issued at market-determined interest rates. Since February 2013, the interest rate has been fixed at about 3 percent which is far below deposit rates and the policy rate.

A01ufig3

Bhutan: Government Borrowing from the Banking System

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

A01ufig4

Bhutan: Government Issuance of Treasury Bills

(Stock and Rate)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Staff Views

19. Monetary conditions should be tightened to ward off prospective overheating and better manage pressures on rupee reserves. Liquidity conditions should be closely monitored and promptly adjusted to prevent excessive credit growth in future. Specifically, the CRR should be adjusted upward, and with further market development, regular and increased issuance of T-bills should be used to mop up excess liquidity. Hydropower-related inflows and aid flows should be fully sterilized to dampen inflation pressures and credit growth, thereby obviating the need for import compression. Tighter macropolicy stances should also help to address competitiveness concerns.

20. Despite progress, considerable enhancements to the monetary transmission mechanism are needed. Interest rates need to be higher and be more closely aligned with those prevailing in India. Notwithstanding the introduction of a new policy rate (which is not yet operationally effective), the framework for monetary operations is underdeveloped, constrained by the limited range of government securities and the lack of money and securities markets. Over the medium term, the development of a formal interbank market and increased and regular issuance of T-bills and bonds are the most critical elements for making monetary policy more effective, for enhancing financial markets, for improving banking system health, and for ensuring overall macro financial stability. While it would entail some costs, introduction of a well-functioning government securities market is critical, and would provide a risk-free benchmark for the financial system (and eventually a yield curve), an investment vehicle for financial institutions, and a tool for open market operations.

Authorities’ Views

21. The authorities agreed on the need to monitor bank liquidity and credit conditions more closely. They acknowledged that external flows should be fully sterilized and that the use of current tools (including the overnight sweeping facility) are insufficient, and are therefore exploring other instruments to manage liquidity. They noted that while credit growth has been reduced, such administrative restrictions are not optimal and will be rolled back once the macroeconomic policy stance is sufficiently tight.

C. External Sector Issues

Background

22. The large current account deficit and the currency composition of reserves have contributed to a recurring shortfall of Indian rupees. Convertible currency reserves are much larger than rupee reserves, which have constituted less than 3 percent of reserves on average during the past 5 years. Rapid credit growth, which led to higher non-hydropower imports, as well as large hydropower-related imports resulted in strong demand for rupees. These pressures culminated in pronounced rupee shortages and prompted two reserves sales of US$200 million each by the RMA in December 2011 and June 2013.6 The RMA also utilized foreign exchange overdrafts with Indian commercial banks and the line of credit with the Government of India. Additionally, a bilateral swap agreement of US$100 million with the Reserve Bank of India was agreed upon in March 2013 and was subsequently used (though it was reversed in September 2013). While these financing instruments helped to relieve immediate reserve pressures, they are expensive and cannot address the ongoing structural need to mobilize rupee reserves.

Staff Views

23. The exchange rate peg with India has served Bhutan well, though the real effective exchange rate is assessed to be above levels suggested by underlying fundamentals. The peg to the Indian rupee remains appropriate and provides Bhutan with an appropriate nominal anchor, given that India is Bhutan’s largest trade and development partner. The ngultrum is currently assessed to be overvalued by between 8–21 percent, though once additional hydropower revenues materialize over the medium term, this overvaluation is projected to dissipate (see Box 5). Bhutan has also ample reserves, as its reserve cover exceeds the standard measures of reserve adequacy and is much higher than peer countries7.

24. Notwithstanding an adequate level of reserves, they have to be managed carefully to contain recurrent pressures. Risks stem from the fact that hydropower-related rupee debt service payments are lumpy and there are timing mis-matches between hydropower-related rupee inflows and outflows. These features require careful management and provisioning in advance for necessary rupees. Also, the currency composition of reserves should be more closely aligned with the structure of Bhutan’s external liabilities and trade (sources of rupee-currency liquidity needs)8. As noted in the 2013 IMF technical assistance on reserve management, consideration should be given to gradually increasing the share of rupee reserves and to adopting reserve management and investment guidelines. Furthermore, once the policy stance is tightened sufficiently and revenue reforms instituted, the import restrictions should be gradually withdrawn, in line with the authorities’ plans.

25. External debt is projected to rise significantly over the medium term. Bhutan’s debt dynamics are subject to moderate risk of distress, as indicated by the Low-Income Country (LIC)-Debt Sustainability Analysis (DSA)—see Supplement I. The construction of new hydropower projects is expected to lead to a substantial build-up of external debt, relative to levels projected during the previous 2011 Article IV consultation. In particular, the LIC-DSA thresholds are breached for several indicators for prolonged periods of time. However, these additional projects are expected to confer strong future economic dividends, boosting future GDP growth and exports. The mitigating factors that were highlighted in the previous DSA remain valid, namely a strong track record of project implementation, commercial viability, and close economic and political ties with India, Bhutan’s main provider of financing for hydropower projects and the key consumer of its electricity exports. Notwithstanding these mitigating factors, additional non-concessional borrowing should be avoided as the level of debt has increased substantially compared to previous DSAs.

26. Recent changes to Bhutan’s foreign exchange framework, including the regulatory responses to the Indian rupee shortage, have given rise to new exchange restrictions subject to Fund approval under Article VIII, Section 2(a). These include: (i) banning residents who do not comply with the requirement to repatriate export proceeds from accessing foreign exchange for unrelated imports; (ii) requiring foreign direct investment businesses to pay for their establishment and operational expenses from their own convertible currency resources; (iii) requiring Bhutanese companies to pay the interest on and amortization of external loans from their own convertible currency resources; (iv) restricting the availability of Indian rupees for making payments and transfers to India in the following current international transactions: personal travel, study-abroad living arrangement, family and salary remittances, advance payments for import from India and to recruit Indian workers, and imports of certain construction materials and vehicles from India; and (v) banning the access to Indian rupees for unrelated current international transactions for those who contravene the RMA’s 2012 guidelines on Indian rupee transactions. The authorities should eliminate the restrictions upon establishing the necessary macroeconomic and structural conditions.

Authorities’ Views

27. The authorities noted that while Bhutan’s reserves exceed most standard reserve adequacy thresholds, reserves have been largely built up through aid flows and not through export earnings. The RMA, with technical assistance from the Fund, has revised its Reserve Management Policy (RMP) and is drafting Investment Guidelines. In line with the new RMP, the RMA has developed a reserve adequacy framework with a threshold based on essential imports and other payments, beyond which the RMA shall convert its convertible currency reserves and increase rupee reserves to meet external obligations. Nevertheless, the authorities noted that since the Indian rupee is not a convertible currency, the RMA will need to calibrate its reserve composition between convertible currencies and rupees cautiously. Also, they underscored that any conversion of convertible currencies to rupees should take into account the Bhutanese Constitutional requirement that the RMA hold 12 months of essential imports cover, as well as third country imports and debt servicing requirements. The authorities considered the maintenance of most exchange restrictions under Article XIV, and those inconsistent with the Article VIII obligations, as necessary given that Bhutan’s reserves are built on aid and external borrowing, and the continuing pressure on Bhutan’s Indian rupee reserves.

Policy Theme #2—Safeguarding Financial Sector Stability and Fostering Deepening

Vigilance on the risks to financial stability is warranted, against the backdrop of rapid credit growth for a number of years. Supervision needs to be strengthened to safeguard asset quality. Over the medium term, further financial deepening will require a comprehensive financial sector strategy that balances the twin objectives of development and financial stability.9

Background

28. Growth in bank credit to the private sector has been rapid, though it has decelerated recently. Private sector credit grew at an average annual rate of 30 percent during 2002–11, increasing credit from 11 to 47 percent of GDP. This compares with a median of 32 percent for lower middle-income countries, and an “expected norm” of 27 percent based upon a regression controlling for relevant country-specific characteristics. This expansion stemmed from an initially-low credit base, ample wholesale liquidity (mostly deposits from the government and government corporations as shown in the chart), growth in civil service wages, the entry of three new banks in 2010, and loose monetary conditions. Additionally, non-bank financial institutions have also engaged in lending. Responding to the shortage of rupees, administrative measures (banning housing and vehicle loans) to slow down credit have resulted in growth of private credit decelerating to 7.4 percent year-on-year in November 2013 and the credit-to-GDP ratio falling to 43 percent in 2013.

A01ufig5

Private Credit / GDP

(In percent)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Source: World Bank FinStat database

29. Financial stability indicators are generally sound, though NPLs have increased recently. For the system as a whole, the Capital Adequacy Ratio remained high (at 18 percent in September 2013), though there is considerable variation across banks. The Statutory Liquidity Requirement (SLR) was also comfortably met at 36 percent in September 2013 (compared with the regulatory minimum of 20 percent), though the SLR includes unsecured longer-term bank deposits with other banks and non-banks, which heightens systemic risk (see chart). Reflecting the economic slowdown, there has been a deterioration in banks’ asset quality, with non-performing loans (NPLs) rising from 8 percent in June 2012 to 12 percent in September 2013. Some sectors are seeing a much sharper increase in NPLs, in particular trade and commerce and personal loans. The bank credit-to-deposit ratio has eased somewhat to 86 percent in September 2013 from over 105 percent in June 2012, as credit has been curtailed.

A01ufig6

Bank Deposits of Public Sector

(Billions of Ngultrum)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

A01ufig7

Financial Institutions Deposits with Other Banks

(Billions of Ngultrum)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

30. Financial sector vulnerabilities arise from growing asset-liability mismatches and concentrated lending. A significant proportion of the deposit base is corporate deposits, which tend to be short-term, seasonal, and volatile, whereas bank credit is concentrated in loans with longer time horizons. The concentration of lending in personal and real estate loans raises particular concerns. More than a quarter of the financial sector’s portfolio consists of building and construction loans, followed by personal loans which constitute around 16 percent of credit outstanding. The prolonged credit boom has been associated with a run-up in real estate prices, and their recent decline may expose weaknesses in asset quality. Stress tests indicate that the banking system would be hardest hit under scenarios involving (i) a large increase in NPLs, which will reduce the banking system’s CAR by 7 percentage points, and (ii) a souring of large exposures which has a particularly sizeable impact on one of the large state owned banks and the private bank with the most significant large exposures (for details please see EFSS supplement).

A01ufig8

Bank Lending, End-June 2012

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

A01ufig9

Bhutan: Sectoral Contributions to Credit Growth

(In percent)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Staff Views

31. Notwithstanding progress, financial sector regulation and supervision need to be strengthened. It is important to monitor vulnerabilities that may have accumulated in the wake of sustained rapid credit growth for a number of years, including sectorally-concentrated lending, asset-liability mismatches, the recent fall in asset values, and increased lending by non-banks. Measures to strengthen regulation and supervision should include closing gaps in regulation, regular stress-testing by the RMA to monitor risks, encouraging banks to conduct their own stress tests, and putting in place crisis management and deposit insurance arrangements.

32. Macroprudential policies should play an active role in containing the buildup of financial sector risks. The RMA should continue to use macroprudential policies but reduce its reliance on a single tool, namely the adjustment of risk weightings, and should undertake a regular review of sector-wide risks. The authorities’ plans to further contain risks by using additional macroprudential tools—including credit-to-deposit, loan-to-value, and debt-to-income limits—are welcome. However, care needs to be taken to sequence these measures appropriately and to provide financial institutions with sufficient time to comply. Instituting investment guidelines for non-banks would be a welcome step, however requirements to limit lending activities should be complemented by measures to enhance investment opportunities (such as encouraging the development of long-dated government securities).

33. Efforts to deepen the financial sector should continue, along with initiatives to make it more inclusive. The preparation of a comprehensive Financial Sector Development Strategy (now under way with World Bank assistance) will provide a careful sequencing of reforms within a medium-term plan. As well, promoting alternatives to bank financing for the private sector, including developing the commercial bond market and private equity markets over the medium term, would be welcome. Floating minority shares of public enterprises would broaden the range of investment opportunities. Efforts to promote financial literacy are valuable and should continue.

Authorities’ Views

34. The authorities highlighted that they are closely monitoring financial sector risks and are planning regular bank stress testing. They acknowledged that short-term deposits dominate the banks’ funding base, and hence, there are asset-liability mismatches. They recognized the need to use varied macroprudential policies and instruments and plan to roll out measures gradually in the coming months to deal with the significant build up in financial sector liquidity, asset-liability mismatches and other sector-wide risks and vulnerabilities. They agreed that further engaging the banks by conducting periodic stress tests would allow for a better understanding of risks.

Policy Theme #3—Diversifying the Sources of Growth and Enhancing Inclusiveness

The key medium-term challenge is to diversify the economy to make growth more sustainable and less volatile, while also reducing the reliance on hydropower. Greater private sector development and job creation would also pave the way for more sustainable and inclusive growth.

Background

35. Diversifying sources of growth is an appropriate and important policy priority for Bhutan. Cross-country research suggests a positive link between trade and real sector diversification and macroeconomic outcomes, including lower output volatility.10 While the expansion of hydropower over the past decade has boosted growth, it has also led to higher growth volatility. In addition, the hydropower sector provides limited employment opportunities. As well, exports have become more concentrated over the last decade (see Selected Issues Paper on Prospects for Economic Diversification).

A01ufig10

Hydro vs. Non-hydro GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Source: Staff estimates.

36. The development of new sectors, export diversification and job creation are central goals of government policy. The government’s Economic Development Policy, as represented in various Five Year Plans and its “Vision 2020” statement, underscore the importance of leveraging hydropower development to achieve broad-based growth, including through encouraging tourism and related services and the development of certain niche products and activities such as organic foods, horticulture, cash cropping, forestry and related activities, and ICT-related industries. Consistent with Bhutan’s emphasis on environmental conservation and sustainable development, the policy promotes green growth. The government has ambitious plans to develop tourism, with the aim of increasing tourist arrivals to 200,000 by 2018 (a fourfold increase from 2012).

Staff Views

37. Economic diversification will ease pressures on external balances, lower output volatility and promote employment creation. Even though hydropower exports are expected to dominate export receipts in the medium term as large projects come on-stream, revenues from this sector should be leveraged to encourage development of a wider range of private sector activity (such as addressing the skills mismatch and investing in infrastructure). As noted in the government’s policy, some sectors in which efforts may be focused include tourism, education and other green services and niche agricultural products (such as organic products), as well as power-intensive manufacturing industries. Efforts should also be made to further improve connectivity and enhance FDI including to facilitate technology transfer, though tax incentives need to be monitored closely and should include sunset clauses.

38. Improvements in the investment climate and access to finance, as well as addressing skills mis-matches in the labor market, would support economic diversification and boost competitiveness. Government policies should seek to address Bhutan’s relatively weak performance on various business climate indicators. Lack of adequate finance for micro and small/medium scale enterprises and skills mis-matches in the labor market are impediments to private sector development. Measures to enhance training (including encouraging vocational training and expanding technical education) programs and improve access to job-related information will be needed to upgrade the skills of the labor force and promote employment creation. In addition, access to finance should be enhanced by encouraging the development of capital markets for large corporates and increased bank finance for micro and small and medium-sized enterprises (such as enhanced credit information).

Authorities’ Views

39. The authorities agreed that diversification is critical for Bhutan’s long-term development prospects. However, options for raising competitiveness may be limited to niche sectors, particularly agricultural products, which may then also boost employment, given the limited employment potential of the hydropower sector. In the tourism sector, traditionally a growth area for Bhutan, infrastructure development (including improved connectivity) will be key to reducing seasonality and the relative concentration of tourism in western Bhutan.

Staff Appraisal

40. While Bhutan has made important economic and social gains, it faces growing external imbalances and associated challenges. Rapid growth, which paved the way for rising income levels and much-improved social indicators, has led to overheating and has placed pressure on the country’s external position. Demand management policies have engendered a slowdown in growth, as the authorities have stepped in to contain overheating. As Bhutan seeks to continue to augment its hydropower capacity and meet future development goals, care has to be taken to prevent overheating from resurfacing and external imbalances from widening further.

41. Bhutan’s growth momentum is expected to recover in the near term. Growth is projected to recover modestly in the current fiscal year, driven by a pick-up in hydropower-related construction and policy measures to revive the economy. Over the medium term (corresponding to the Eleventh Five-Year Plan), growth is expected to pick up more robustly, boosted initially by hydro-related construction and then by electricity generation in later years. Inflation is expected to remain elevated, closely tracking Indian inflation. At the same time, the current account deficit is projected to widen considerably due to stronger hydro-related imports. Risks are tilted to the downside due to high public debt, potential financial sector vulnerabilities, and the need to manage recurrent pressures on Indian rupee reserves. The possible negative spillovers to Bhutan from slower Indian growth are mitigated by the concentration of exports in the hydropower sector, which enjoys healthy demand from India, and on long-term India-financed investment projects and electricity purchase agreements.

42. It is critical that the fiscal stance be tightened in the near term to ensure that overheating pressures do not reemerge and public debt remain contained. Revenue reforms are essential, including reducing the number of zero-rated goods, widening taxation of domestic activity, and improving tax administration. In addition, if there are further shortfalls in grants, restraining expenditure while prioritizing social and productivity-enhancing capital spending will be appropriate. Any civil service wage hike should be accompanied by complementary revenue measures, otherwise they could lead to further deterioration of fiscal balances and a resurgence of overheating pressures. Over the medium-term, consideration should be given to introducing a value added tax to boost revenue collection.

43. Monetary conditions should be tightened to ward off prospective overheating and manage pressures on rupee reserves. Liquidity conditions should be closely monitored and promptly adjusted to prevent excessive credit growth in future. Specifically, the CRR should be adjusted upward, and with further market development, more regular and increased issuance of treasury bills should be used to mop up excess liquidity. Inflows related to hydropower projects and aid flows should be fully sterilized. Interest rate spreads need to be narrowed and reflect market conditions. Over the medium-term, it is essential that the monetary transmission mechanism be further improved, and that initiatives be undertaken to further deepen the financial system.

44. The exchange rate peg with India has served Bhutan well, though the real effective exchange rate is assessed to be above levels suggested by underlying fundamentals. The ngultrum is currently assessed to be overvalued. Tighter macropolicy stances and structural reform to enhance the business climate should also help to address competitiveness concerns. Over the medium term, once hydropower revenues materialize, this overvaluation is projected to dissipate.

45. External reserves have to be managed carefully to contain recurrent pressures. Timing mis-matches in hydropower-related rupee inflows and outflows require careful management and provisioning for the necessary rupees in advance. Also, the currency composition of reserves should be more closely aligned with the structure of Bhutan’s external liabilities and trade. Furthermore, once the policy stance is tightened sufficiently and revenue reforms are instituted, there should be a gradual withdrawal of import restrictions.

46. Growing risks to financial stability necessitate continued vigilance and action, given past rapid private credit growth, sectorally-concentrated lending, growing asset-liability mismatches, and lending by non-banks. Supervision and regulation need to be strengthened to monitor and safeguard banks’ asset quality and limit systemic risk, including by use of macroprudential measures. Measures to strengthen regulation and supervision should include closing gaps in regulation, regular use of stress-testing by the RMA to monitor risks, encouraging financial institutions to conduct their own stress tests, and putting in place crisis management and deposit insurance arrangements. Also, further financial deepening should be balanced with the need to maintain financial stability.

47. Efforts to diversify the economy to make growth more sustainable and less volatile should be stepped up. Diversification will ease external pressures, lower output volatility and promote employment creation. Measures to improve the investment climate, broaden access to finance and address skills mis-matches in the labor market would help economic diversification and boost competitiveness.

48. The authorities did not request and staff does not recommend approval of the exchange restrictions maintained inconsistent with Article VIII obligations. Bhutan continues to maintain exchange restrictions under the transitional arrangements of Article XIV, Section 2. Given the limited and unpredictable sources of convertible currency inflows and justifiable concerns over outflows, staff encourages the authorities to gradually ease the exchange restrictions towards their eventual elimination including restrictions that have been maintained under Article XIV, Section 2, which should be eliminated as soon as Bhutan’s balance of payments position permits. Staff also recommends that the authorities eliminate the exchange restrictions, which result from inconsistencies in the applicable legal framework or where the practice is more liberal than the legal framework, early in the process. The authorities are encouraged to consider accepting the obligations under Article VIII, Sections 2(a), 3 and 4, of the IMF’s Articles of Agreement in due course.

49. It is recommended that the next Article IV consultation take place on a 24-month cycle in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96) (9/28/2010)).

Gross National Happiness1

Gross National Happiness (GNH) is a unique approach to development that has been pioneered by Bhutan. Developed in the 1970s, this approach to development, which measures well-being of its citizens not based on GDP but on the principles of GNH, which considers the spiritual, physical, social and environmental health of its citizens and the natural environment. Since 2008, precise metrics to measure GNH have been developed based on equitable social development, cultural preservation, conservation of the environment and promotion of good governance. The GNH Index provides an overview of performance across 9 domains, which include psychological well-being, time use, community vitality, cultural diversity, ecological resilience, living standard, health, education, good governance. According to the 2010 GNH Survey, 40.9 percent of Bhutanese are “happy.” In March 2012, the United Nations hosted a major conference on GNH and adopted UN Resolution 65/309 which recognized the pursuit of happiness as a fundamental human goal. Since then, Bhutan has convened a high-level panel of international experts to make recommendations to the UN General Assembly.

1 Prepared by Sonali Jain-Chandra.

Inflation in Bhutan1

Historically, headline inflation tracked close to the world median, but started to diverge upward from mid-2009. Currently, Bhutan is in the top decile of world inflation, and is tracking its peers in frontier and developing (FD) Asia more closely as compared to the pre-2009 period. Much of the rising inflationary trend of the recent past is explained by greater non-food inflation. This coincides with the expansion of domestic demand driven by rapid credit growth, in the aftermath of the commissioning of the large Tala hydropower project. The increase in government wages and salaries may also have contributed to inflationary pressures. However, in the absence of detailed data on inflation in traded and non-traded goods and services, and the high degree of import dependence, it is difficult to assess the role of domestic drivers of inflation.

Given that the bulk of Bhutan’s imports are sourced from India (about three quarters on average), a strong relationship can be observed between Indian and Bhutanese inflation over a fairly long time series.2 The growth rate of Bhutan’s CPI and India’s CPI (industrial workers) appear to track very closely, and given the close economic ties between the two countries, suggests an equilibrium or co-integrating relationship in which Bhutan’s inflation converges to that of India. Indeed, Granger causality tests confirm that lags of India’s inflation help to explain Bhutan’s inflation (and not vice versa). A vector error correction model shows that inflation in both countries is cointegrated, and that Bhutan’s inflation converges to that of India fairly rapidly within two periods (which is equivalent to one year, based on semi-annual data).

A01ufig11

CPI Inflation: Bhutan vis-a-vis World

(In percentage, year-on-year)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Note: Shaded area represents World’s 90th and 10th percentiles.Source: IFS database; and IMF staff estimates.
A01ufig12

Bhutan Headline, Food and Non-food Inflation

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Sources: Royal Monetary Authority of Bhutan; various reports.

Based on this statistical relationship, a simple inflation forecasting model for Bhutan—where the change in Bhutanese inflation depends on contemporary and lagged change in India’s inflation, lagged change in Bhutan’s inflation, and the lagged difference between Bhutan and India’s inflation rates—shows that about 40 percent of the change in inflation is due to the contemporary change in India’s inflation, and 60 percent due to the lagged difference between India and Bhutan’s inflation, thereby showing strong convergence properties. Given this dynamic and forecasts of India’s inflation (see India: 2014 Article IV Consultation (IMF Country Report No. 14/57), Bhutan’s inflation is expected moderate, but remain high, at an average of over 9 percent in the near-to-medium term.

A01ufig13

CPI Inflation in Bhutan and India

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Source: IMF staff calculations.
A01ufig14

Bhutan vs. India: CPI Inflation

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Source: IMF staff calculations.
1 Prepared by Adil Mohommad.2 Quarterly inflation data are available only from 2003 onward, and semi-annual data series stretch back from 1980.

The Macroeconomic Effects of Hydropower Development in Bhutan1

Bhutan plans to expand its power generation capacity to 10,000 megawatts (MW) by 2020, considerably larger than its current level of 1,480 MW. There are currently four major hydroelectric facilities in operation (i.e. Chukha, Basochhu, Kurichhu and Tala) and further projects are being developed (see Table). The development of these hydropower plants (exporting electricity to India) are mostly financed by a combination of loans and grants from the Government of India. Other sovereign and multinational contributors, including the Government of Austria and the Asian Development Bank, have also funded and developed some hydroelectric projects. In the early 2010s, Bhutan began to shift its focus to joint ventures and public-private partnerships for future hydropower development.

Table. Summary of Hydropower Projects in the Pipeline

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Source: Annual Report 2012/13, Royal Monetary Authority of BhutanNote: CEA: Central Electricity Authority, Government of India.

GDP growth, the fiscal and external positions, monetary conditions, and public debt are driven largely by developments in the hydropower sector. Hydropower generation is the key source of national income in Bhutan (about one-fifth of Bhutan’s GDP) and an important source of government revenues (about 30 percent of total revenues). Hydropower projects and credit-fuelled private consumption have propelled a decade of high growth and improving living standards in Bhutan. While hydropower projects have boosted government revenues, they have also given rise to recurring balance of payments pressures. External debt also increased to 85 percent of GDP at end 2012/13, in large part due to hydropower-related borrowing. Looking ahead, during the Eleventh Five Year Plan, Puna I, Puna II and Mangdechu hydro plants are projected to boost economic growth during the construction phase and the commissioning stage (as they come on stream in 2017/18). The current account deficit is projected to deteriorate over the medium term due to strong import growth associated with the construction phase, as well as hydro debt service. Upon the completion of hydropower projects, however, revenues and electricity exports are likely to increase significantly, and the trade balance should improve. Bhutan’s rapid hydropower development is also projected to lead to a substantial buildup of external debt in the medium-term.

Hydropower sector development poses challenges for macroeconomic management in Bhutan. Following the commissioning of the Tala in 2006/07, the installed power capacity of Bhutan increased three fold and there was a surge in power exports and government revenues, a build-up of reserves, a credit boom and significant overheating pressures (especially due to housing and vehicle loans), all of which eventually resulted in a sharp widening of the current account deficit. A pronounced rupee shortage arose from loose macroeconomic policies, rapid credit growth, withdrawal of short-term government and government corporation deposits (for investment in projects), and timing mis-matches in bulky hydro-related transactions. As a result, the RMA had to resort to recurrent short-term borrowing of rupees from India at considerable cost and selling of some of its U.S. dollar reserves. Rupee borrowing then resulted in a contraction of the monetary base, creating tight liquidity in the market.

Going forward, it will be important to be mindful of spillovers from hydropower-related inflows. The above challenges may arise again as Bhutan is expected to attract more inflows (grants, loans and export revenues) for hydropower projects. If there is a surplus on the balance of payments, there could be an expansion of the monetary base, which, if allowed to result in high credit growth, could lead to an excess demand for Indian rupees. Nonetheless, if the non-hydropower sector of the economy is carefully calibrated so that growth rate of imports does not exceed those of exports and other rupee obligations, then the medium-term risks can be managed. To be successful, this calibrated response will require coordinated fiscal and monetary policies.

1 Prepared by Mehdi Raissi.

Spillovers from India to Bhutan1

The macroeconomic situation in Bhutan is closely tied to that of India. India is the largest trading partner for Bhutan (about 80 percent of Bhutan’s commodity exports are destined for India and about 70 percent of Bhutan’s imports are from India). India is the primary destination for Bhutan’s electricity exports and in turn supplies most of the financing for hydropower development in the form of grants and loans—of the total rupee debt, 85 percent is outstanding public debt on hydropower projects while the remaining 15 percent represented overdrafts from Indian commercial banks and the Government of India line of credit. Furthermore, about 35,000 Indian tourists visit Bhutan annually and there is a strong long-run relationship between India and Bhutan’s inflation rates (see Box 1).

This Box develops a long-run structural macro-econometric model for Bhutan to evaluate the nature and strength of its economic linkages with India, and to study inward spillovers to Bhutan from output shocks in India. Using quarterly data between 1981Q2 and 2011Q2 on core macroeconomic variables for Bhutan and a number of key Indian variables, two long-run relationships are identified: an augmented Purchasing Power Parity (PPP) relationship which specifies the link between “India and Bhutan’s output differential” and “real exchange rate”, and an equation linking Indian and Bhutanese inflation rates.2 The hypothesis that a large share of Bhutan’s output volatility can be associated with fluctuations in India’s growth is confirmed empirically. Specifically, any slowdown in India can bring about negative spillovers to Bhutan. A one percent decline in the GDP of India generates significant output losses in Bhutan, corresponding to around 0.18 percent after one year. Figure 1 shows the estimated median impulse responses (for up to 40 quarters) of the key macroeconomic variables of Bhutan to a one-percent GDP shock in India, together with the 16th and 84th percentile error bands. The results indicate that a growth slowdown in India decreases inflation in Bhutan (as output gap widens in India) and causes a real-exchange-rate depreciation.

Figure 1.
Figure 1.

Impact of negative output shocks in India

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

The growth slowdown in Bhutan can be explained both by domestic factors and, to a lesser extent, external conditions (i.e. in India). Risk aversion on the part of global investors, in mid-2013, resulted in a moderation in capital inflows to India, a rise in long-term bond yields, and exchange rate depreciation. Investor concerns were amplified by India’s persistently-high inflation, worsening growth prospects, large external current account and fiscal deficits. Bhutan, with its peg to the Indian rupee, has been only moderately affected. Considering that growth in Bhutan is driven by hydropower exports to India; electricity generation and exports are dependent on long-term India-financed investment projects and electricity purchase agreements; and that Indian demand for electricity is inelastic, the negative spillover effects to Bhutan were dampened (they could have been much larger otherwise).3 Most of the slowdown in Bhutan is attributable to demand side measures put in place by the authorities.

1 Prepared by Mehdi Raissi.2 The model has the following variables: real GDP, inflation, interest rate differential between Bhutan and India, real exchange rate, the price of oil, real GDP of India and Indian CPI inflation. Annual data were linearly interpolated backward when quarterly observations were missing for Bhutan.3India Selected Issues (IMF Country Report 14/58) shows that a one-percent decline in the GDP of India generates larger output losses in Nepal.

Real Exchange Rate Assesment1

This Box assesses real exchange rate in Bhutan using three model-based approaches, suitably adjusted to capture the relevant features of the Bhutanese economy and data constraints.2 These methods include the external sustainability (ES) approach; the macroeconomic balance (MB) method; and a (reduced form) equilibrium real exchange rate (ERER) technique.

Several adjustments are made to the standard framework to overcome the conceptual and methodological challenges inherent in assessing the real exchange rate in low-income countries and renewable-resource-rich economies. First, a large sample of countries (including those with characteristics similar to Bhutan) is used to calculate the CA norm and the equilibrium exchange rate misalignment, using data over the period 1973–2012 and correcting for structural breaks in the data series. This large dataset helps to alleviate the multilateral inconsistency problem, sample selection bias and statistical over fitting. Second, the determinants of the CA are augmented with aid flows and remittances, to better reflect the specific characteristics of LICs. Third, an econometric technique is used that mitigates the potential endogeneity of the variables and exploits the panel nature of the data. Finally, the CA is stripped of Bhutan-specific temporary factors (over importation that will be accompanied by higher hydro-exports in the long run) to arrive at a more reasonable underlying CA.

A01ufig15

Nominal and Real Effective Exchange Rates

(Index, 2005=100)

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Sources: IMF, Information Notice System.

These model-based approaches indicate a real exchange rate overvaluation in the range of 8.5 to 21 percent. The macrobalance approach suggests a CA norm of -12 percent of GDP, about 4 percentage points less than the underlying CA in the medium-term. Based on an elasticity of the CA to the real effective exchange rate of -0.25 percent, as referenced by Vitek (2009), this would imply an exchange rate misalignment of about 16 percent (this result also involves a multilateral consistency adjustment). The external sustainability approach estimates a CA norm for Bhutan which stabilizes the NFA/GDP of the country around its norm (which is estimated from a panel data model). Comparing this CA norm with its underlying value, while using the above elasticity, implies a REER overvaluation of 21 percent. Finally, the reduced form equilibrium real exchange rate approach suggests an overvaluation of around 8.5 percent.

These methodologies are subject to limitations and are sensitive to assumptions, and so should be viewed with some caution. The assessment of real exchange rate misalignment in countries with foreign exchange rationing (which are therefore persistently on the supply curve for foreign exchange and off their demand curve) is especially difficult, because the equilibrium is not found within the data. In addition, using estimated coefficients from a panel of countries that are in different stages of development (when compared to Bhutan) may also bias the results. Furthermore, Bhutan is currently going though an important transition by building up its hydropower generation capacity, where such capacity is mainly financed by bilateral aid from India. Given this structural characteristic, results using the standard exchange rate assessment toolkit may suggest overvaluation, but some of the required adjustment in the external position will happen naturally as the current scale-up in import-intensive investments leads to a permanent boost in hydropower-related exports in the long run.

Over the medium term, further structural reforms are central to strengthening competitiveness. Bhutan’s exports have shown a lack of diversification and its export basket has a falling share in world exports. Required policy measures include addressing key structural deficiencies such as shortage of skilled labor and access to finance, as well as encouragement of niche sectors such as tourism, agri-business, and energy intensive activities that could take advantage of access to cheap and clean power (Selected Issues Paper III). Efforts to enhance the business climate (Figure 4) and achieve productivity gains will help offset any potential real exchange appreciation that may follow from rapid growth and resulting implications for the demand for nontradables.

1 Prepared by Mehdi Raissi.2 See Vitek, F., 2009, “Exchange Rate Assessment Tools for Advanced, Emerging, and Developing Economies (Washington: International Monetary Fund) and Chen, S., Dwight, L., Nkusu, M., Raissi, M., Ter-Martirosyan, A., Vitek, F., and A. Watson, 2014, “External Assessments in Special Cases”, Strategy Policy and Review Departmental Paper, (Washington: International Monetary Fund) for details about the CGER-type methodologies.

Bhutan. Risk Assessment Matrix

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“L”=Low; “M”=Medium; “H”=High.The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
Figure 1.
Figure 1.

Bhutan: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Sources: IMF, International Financial Statistics, Royal Monetary Authority of Bhutan, and IMF staff calculations.
Figure 2.
Figure 2.

Bhutan: External Developments

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Sources: IMF, International Financial Statistics, Royal Monetary Authority of Bhutan, and IMF staff calculations.
Figure 3.
Figure 3.

Bhutan: Fiscal and Monetary Developments

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Sources: IMF, International Financial Statistics; Royal Monetary Authority of Bhutan; and IMF staff calculations.
Figure 4.
Figure 4.

Bhutan: Business Environment and Governance

Citation: IMF Staff Country Reports 2014, 178; 10.5089/9781498357708.002.A001

Note: As pointed out in an independent evaluation of the Doing Business survey (see www.worldbank.org/ieg/doingbusiness), care should be exercised when interpreting these indicators given subjective interpretation, limited coverage of business constraints, and a small number of informants, which tend to overstate the indicators’ coverage and explanatory power.
Table 1.

Bhutan: Selected Economic Indicators, 2009/10–2014/15 1/

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Sources: Bhutanese authorities; and IMF staff estimates and projections.

Fiscal year begins July 1.

Public and publicly guaranteed debt, including loans for hydropower projects and the purchase of one aircraft.

On a calendar year basis (e.g., the entry for 2009/10 is for 2009).

Table 2.

Bhutan: Government Budget Summary, 2009/10–2013/14 1/

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Sources: Data provided by the Royal Government of Bhutan; and Fund staff estimates and projections.

Revenues (including interest receipts), interest payments, and foreign financing include flows related to hydropower projects.

Table 3.

Bhutan: Balance of Payments, 2009/10–2017/18

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Sources: Data provided by the Bhutanese authorities; and Fund staff estimates and projections.

Debt service for Tala hydropower project starts in 2007/08.

Including budgetary and off-budgetary grants.

Including grants for Tala, Puna I, Puna II and Mangdechu hydropower projects.

Including trade credit, rupee credit lines, short-term capital flows and IMF SDR allocation in 2009.

Table 4.

Bhutan: Medium-Term Macroeconomic Framework, 2009/10–2018/19

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Sources: Data provided by the Bhutanese authorities; and Fund staff estimates and projections.

Revenues (including interest receipts), interest payments, and foreign financing include flows related to hydropower projects.

Table 5.

Bhutan: Monetary Survey, 2008/09–2012/13

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Sources: Data provided by the Bhutanese authorities; and Fund staff estimates.

Includes deposits of some public enterprises and off-budgetary entities; as such, data differ from bank financing data reported in the fiscal accounts.

From 2011/12 onward, public enterprises include government corporations and other public corporations as in the previous definition.

From 2011/12 onward, private sector credit includes joint corpoerations, NBFIs and private sector as in the previous definition.

Includes foreign exchange valuation adjustments and capital accounts.

Includes time and foreign currency deposits.

Table 6.

Bhutan: Financial Soundness Indicators, 2006/07–2012/13 1/

(In percent, unless otherwise specified)

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Source: Royal Monetary Authority of Bhutan.

Data are for July–June fiscal years.