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October 2018
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 2018 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 October 26, 2018 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 October 26, 2018, following discussions that ended on July 4, 2018, 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 August 7, 2018.
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.
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© 2018 International Monetary Fund
Front Matter Page
Staff Report for the 2018 Article IV Consultation
August 7, 2018
Key Issues
Context: Bhutan has made significant strides in improving per capita incomes and reducing poverty, with growth strong and inflation in single digits. While still large, external imbalances are declining. Welcome progress has also been made on structural reforms. Key medium-term policy challenges include the mobilization of domestic revenues and prudent management of hydropower revenues to support adequate levels of public spending, while maintaining macroeconomic stability, and enhancing competitiveness and diversifying the sources of growth.
Outlook and Risks: Risks to the outlook are skewed to the downside, but active policies could lead to higher growth outcomes. On the domestic side, delays in implementing the goods and services tax (GST) and completing hydropower projects could lead to lower electricity exports and larger fiscal deficits. However, a more gradual fiscal consolidation could lift growth above the baseline forecast. External risks stem from weaker growth and higher inflation in India and increases in global oil prices.
Key Policy Recommendations:
Fiscal consolidation is appropriate to reduce vulnerabilities. However, a more gradual pace than envisaged in the draft 12th Five-Year Plan would help lessen the planned sharp fall in capital spending and better support growth. Resources should be secured for timely implementation of the GST project. Public financial management should be further strengthened, including by replacing the current five-year planning cycles with a rolling multiyear budget framework and enhancing fiscal transparency. Comprehensive medium-term debt management and public debt market development strategies are needed.
Plans to modernize the monetary policy framework and establish an interest rate corridor should continue. Once this framework is in place, a review of the Minimum Lending Rate is advised with an eye of evaluating its benefits against the costs of potential distortions.
The loan loss classification requirements for banks should be tightened and risk-based provisioning mandated as a supplementary measure. A gradual reduction of banks’ liquidity requirements should be pursued, once the RMA’s liquidity facility is in place. The credit assessment of priority sector lending proposals should be kept at par with those for market-based lending and progress evaluated regularly.
The business climate and access to finance should be further improved. More targeted training for Bhutanese workers should be undertaken and barriers for skilled immigration reduced. The authorities should revisit the relatively high minimum threshold for foreign direct investment (FDI) and, in some cottage and small industries, remove the FDI restrictions.
Approved By
Ranil Salgado (APD) and Kevin Fletcher (SPR)
Discussions took place in Thimphu during June 25–July 4, 2018. The team comprised Mr. Grigorian (head), Mr. Mohommad, Ms. Moussa (all APD), and Mr. Bauer (Senior Resident Representative). The mission met with Prime Minister Tshering Tobgay, Minister Namgay Dorji, Governor Dasho Penjore, and other senior government officials. Ms. Dhillon (OED) attended all meetings, and Mr. Gokarn (OED) attended the meeting with the Prime Minister and the concluding meeting. Staff from the World Bank and Asian Development Bank joined the meetings. Ms. Inoue and Mr. Singh (both APD) assisted in the preparation of this report.
Contents
RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
MACROECONOMIC AND FINANCIAL POLICIES
A. Fiscal Policy
B. Monetary Policy
C. Financial Sector
D. External Sector and Exchange Rate Policy
E. Structural Issues
STAFF APPRAISAL
BOXES
1. Poverty Trends
2. Goods and Services Tax
FIGURES
1. Recent Macroeconomic Developments
2. External Developments
3. Fiscal, Monetary, and Financial Developments
TABLES
1. Selected Economic Indicators, 2012/13–2018/19
2. Government Budget Summary, 2012/13–2022/23
3. Balance of Payments, 2013/14–2022/23
4. Medium-Term Macroeconomic Framework, 2012/13–2022/23
5. Monetary Survey, 2013/14–2017/18
6. Financial Soundness Indicators, 2008/09–2017/18
APPENDICES
I. Priority Sector Lending Guidelines
II. Risk Assessment Matrix
III. Guiding Principles for the Stabilization Fund Management
IV. Composition of Credit and Economic Activity
V. External Sector Assessment
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August 7, 2018
Prepared By
Asia and Pacific Department
Contents
FUND RELATIONS
INFORMATION ON THE ACTIVITIES OF OTHER IFIS
STATISTICAL ISSUES
Front Matter Page
August 7, 2018
Approved By
Ranil Salgado and Kevin Fletcher (IMF) and John Panzer (IDA)
Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA)1
The assessment of Bhutan’s external risk has not changed materially from the 2016 DSA. Given the unique nature of the bulk of Bhutan’s debt stock, as spelled out in the 2014 and 2016 DSAs, the risk of debt distress is assessed to remain moderate despite breaches in all five indicators under the baseline. The unique mitigating circumstances are as follows. A large share of outstanding public and publicly guaranteed debt external debt is linked to hydropower project loans from the government of India (GoI). These projects are implemented under an intergovernmental agreement in which the GoI covers both financial and construction risks of the projects and buys surplus electricity at a price reflecting cost plus a 15 percent net return. Debt dynamics are set to improve over the medium term driven by a significant increase in electricity exports and decline of imports associated with hydropower construction. While India’s political commitment to increase its reliance on clean energy continues to provide reliable demand, India’s recent power surplus and financing models for new projects where the construction risk is not guaranteed by India (e.g., joint ventures and public-private partnerships) are sources of risk.
Contents
BACKGROUND
UNDERLYING ASSUMPTIONS
EXTERNAL DSA
PUBLIC DSA
CONCLUSION
FIGURES
1. Bhutan: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2018–2038
2. Bhutan: Indicators of Public Debt Under Alternative Scenarios, 2018–2038
TABLES
1. Key Macroeconomic Assumptions, 2018–2036
1. Bhutan: External Debt Sustainability Framework, Baseline Scenario, 2015–2038
2. Bhutan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–2038
3. Bhutan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038
4. Bhutan: Sensitivity Analysis for Key Indicators of Public Debt, 2018–2038
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Press Release No. 18/401
FOR IMMEDIATE RELEASE
October 30, 2018
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