Front Matter Page
IMF Country Report No. 16/206
BHUTAN
2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR BHUTAN
June 2016
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2016 Article IV consultation with Bhutan, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 22, 2016 consideration of the staff report that concluded the Article IV consultation with Bhutan.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 22, 2016, following discussions that ended on May 9, 2016, with the officials of Bhutan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 8, 2016.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association (IDA).
A Statement by the Executive Director for Bhutan.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
E-mail: publications@imf.org Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
© 2016 International Monetary Fund
Front Matter Page
BHUTAN
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
June 8, 2016
Key Issues
Context. Macroeconomic conditions have improved recently. Growth appears to be picking up while inflation has declined to low single digits; foreign reserves have been increasing on the back of a strong financial account; the fiscal balance has recorded a surplus in the past two years; and credit growth remains moderate. Financial soundness indicators point to a modest improvement in the health of the financial sector.
Challenges. In the near-term, the main challenge is to maintain stable macroeconomic conditions as capital spending accelerates in the final years of the current five-year plan. Looking ahead, the projected increase in hydropower exports needs to be managed carefully, to avoid overheating and external pressures. A temporary hydropower-related increase in revenues could create pressures for higher spending.
Main Policy Recommendations.
A large easing of the fiscal stance should be avoided. Given demand conditions, significant increases in capital spending would provide an unsuitably large fiscal stimulus, stretch the absorption capacity of the economy, and increase external pressures.
Tax revenue reform is needed to broaden the tax base, improve revenue collection and reverse the recent decline in the tax-to-GDP ratio. Existing tax exemptions should be phased out, and granting of new exemptions should be limited.
The projected spike in hydropower exports and revenues should be managed carefully, to avoid undermining competitiveness and destabilizing the economy. The fiscal institutional framework could be strengthened to ensure that a temporary spike in budget revenues does not lead to a hurried increase in spending.
Credit and liquidity conditions should be closely monitored and hydropower-related inflows sterilized, to prevent overheating and a resurgence of external pressures. Additional instruments of liquidity management should be developed, to improve monetary policy transmission. Reserve composition should be better aligned with the composition of external debt and trade flows, and reserve management strengthened. The share of Indian rupee reserves should be increased, and the reserves invested in safer Indian government securities.
Approved By
Paul Cashin (APD) and Andrea Richter-Hume (SPR)
Discussions took place in Thimphu during April 27 – May 9, 2016. The staff team comprised J. Jonas (head), T. Richardson (senior resident representative in Delhi), P. Khera and V. Tulin (all APD). Mr. Chaturvedi (OED) participated in key policy meetings. The mission met with Governor Dasho Penjore, Minister of Economic Affairs Lekey Dorji, Director of Department of National Budget of the Ministry of Finance Lekzang Dorji, Director of Department of Public Accounts of the Ministry of Finance Choiten Wangchuk, and other senior officials and representatives of the business community. May Inoue and Michael Dalesio (both APD) assisted in the preparation of this report.
Contents
INTRODUCTION
MACROECONOMIC OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Fiscal Policy
B. Monetary and Financial Sector Policies
C. External Sector
STAFF APPRAISAL
BOXES
1. Inflation in Bhutan: Near-Term Outlook and Considerations for the Long-Term
2. Bhutan’s Labor Market: Problems and Solutions
3. Base Rate System in Bhutan
4. External Sector Assessment
5. Assessing Reserve Adequacy
FIGURES
1. Recent Macroeconomic Developments
2. External Developments
3. Fiscal and Monetary Developments
4. Business Environment and Governance
TABLES
1. Selected Economic Indicators, 2012/13–2017/18
2. Government Budget Summary, 2012/13–2017/18
3. Balance of Payments, 2012/13–2019/20
4. Medium-Term Macroframework, 2012/13–2020/21
5. Monetary Survey, 2010/11–2014/15
6. Financial Soundness Indicators, 2006/07–2014/15
ANNEX
1. Risk Assessment Matrix
Front Matter Page
BHUTAN
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
June 8, 2016
Prepared By
Asia and Pacific Department
Contents
FUND RELATIONS
RELATIONS WITH THE WORLD BANK GROUP
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
Front Matter Page
BHUTAN
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS 1
June 8, 2016
Approved By
Paul Cashin and Andrea Richter Hume (IMF) and Satu Kahkonen (IDA)
Prepared by
International Monetary Fund International Development Association
The assessment of Bhutan’s external risk has not changed materially from the 2014 DSA. Since FY2010/11, Bhutan’s rapid hydropower development has led to a substantial buildup of external debt. As a consequence, external debt ratios breach all indicative thresholds, and these breaches are projected to continue for several more years.2 The extent and length of these breaches indicate a high risk of external debt distress. However, based on unique mitigating circumstances (as spelled out in the 2014 DSA), staff continue to assess Bhutan’s external risk as moderate. These mitigating factors are as follows. A large share of external debt is linked to hydropower project loans from the Government of India (GoI). GoI covers both financial and construction risks of these projects and buys the surplus electricity output at a price reflecting cost plus a 15 percent net return. India’s large unmet demand for power and the political commitment to increase its reliance on clean energy ensure a strong demand even in the current environment of low prices of alternative energy sources. As a result, Bhutan’s debt situation is expected to improve in the medium and long term, reflecting significantly higher electricity exports when hydropower projects come on stream. This being said, stress tests to public sector debt dynamics reveal the need for fiscal consolidation and the importance of sustaining economic growth going forward.
Front Matter Page
Press Release No. 16/313
FOR IMMEDIATE RELEASE
June 29, 2016
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Front Matter Page
Statement by Subir Gokarn, Executive Director for Bhutan and Indu Chaturvedi, Senior Advisor to Executive Director June 22, 2016
