Service sector the worst hit by pandemic

By Tandin Wangchuk

Apart from all the other major sectors that has been affected, the agriculture sector remains the only sector unaffected by the pandemic. Agriculture, livestock, and forestry remains unaffected by the pandemic as the focus has been to ensure uninterrupted food supply under the ECP.

Various initiatives like the buy-back program, commercialization of agriculture and livestock production mainly supported by FMCL and BLDCL provided the agriculture sector with renewed goals to achieve self-sufficiency and import substitution.

Through such initiatives, the agriculture sector is estimated to grow at 2.6 percent in 2020 and 6.7 percent in 2021, contributing about 17.1 percent and 17.8 percent of GDP in 2020 and 2021. In the medium term, the sector is projected to grow at a rate of 4.4 percent on average.

The industry sector output fell despite a boost in Hydropower. Electricity has been the main driver of growth in the industry sector with export earnings remaining inelastic to economic disruptions.

Substantial increase in electricity export earnings, enhanced by MHP coming on stream, has offset the setback in industry sector to a large extent.

As a result, the industry sector contribution to GDP is estimated to increase by 38.5 percent in 2020 attributed to increased electricity generation and partly due to higher budget allocated for planned activities during the current FY.

However, its growth is expected to contract to -4.4 percent as output of other sub-sectors such as manufacturing, mining, construction, and non-hydro exports have declined. The sector is expected to contribute 38.8 percent to GDP in 2021 and 36.8 percent of GDP in 2022.

In the medium term, the sector’s contribution to GDP is expected to remain stable at 39.8 percent, with an average growth of 5.4 percent.

The service sector is also severely hit by COVID-19 containment measures. The service sector mainly driven by tourism, finance, and government services, accounted for 43.4 percent of GDP and grew by 12.5 percent in 2019.

The annual growth and share of Wholesale and Retail Trade; Hotels and Restaurants; Transport, Storage & Communication; Finance, Insurance & Real Estate; and Government Services in 2019 remained equally robust and stable, contributing to a distributed and broadbased service sector growth.

However, the sector’s performance declined substantially in 2020 as tourism and allied sectors were impacted by the pandemic.

Total international arrivals in 2020 fell by 91.2 percent as foreign travels were restricted and remained closed since March 2020. The gross earnings that include receipts from the Minimum Daily Package Rate (MDPR) applicable to international tourists and out-of-pocket spending amounted to USD 13.793 million only compared to USD 170.100 million in 2019.

Hotels and restaurants as a share of GDP is estimated to fall from 2.6 percent in 2019 to 0.3 percent in 2020. Similarly, Transport, Storage, and Communication sector’s share are estimated to fall from 10.7 percent in 2019 to 8.9 percent in 2020, the impact largely being in the transport sector.

As a result, service sector growth is expected to decline by -7.9 percent compared to 12.5 percent in 2019. Its overall contribution to GDP is also estimated to fall from 43.4 percent in 2019 to 40.6 percent in 2020.

Further, the use of hotels as quarantine facilities and contribution from Government Services (14.5 percent of GDP) have minimized the impact on service sector.

The service sector is expected to grow at least by 4.3 percent on average over the medium term, accounting for 41.8 percent of GDP, with the assumption tourism sector reopens by end of 2021 based on the efficacy of the vaccination program as second dose would be completed in most of the countries in the region.

Fiscal Outlook: FY 2021-22

As a response to the pandemic, the government will continue to focus on targeted measures to support economic recovery. Accordingly, budget allocations will be channeled towards more targeted programs and activities that transmit high multiplier effect to ensure value-for-money.

The Government will continue to invest in public infrastructure projects to boost private sector participation and stimulate economic growth.

During FY 2021-22, the domestic revenue is estimated to grow by 7 percent from a drop of -8 percent in FY 2020-21.

Domestic revenue is estimated at Nu. 35,600 million of which 64 percent is tax revenue and 36 percent is non-tax revenue.

Besides improved performance in direct taxes, indirect taxes such as sales tax, domestic excise duty, and green tax are also expected to grow proportionately. The increase in indirect taxes is mainly due to the Government’s expansionary fiscal approach through intensive capital investment activities and increased Government consumption.

As a result, tax revenue during the FY 2021- 22 is expected to grow by 25 percent from -19 percent in FY 2020-21.

FM Reports on National Budget

The Finance Minister presented the National Budget for the FY 2021-22 along with the budget expenditure of the previous fiscal year this week in the ongoing National Assembly session.

The budget for the Financial Year 2021-22, is  formulated with the theme to ensure “Sustained Economic Stability for a Resilient Recovery” and  that the Government pursues an expansionary fiscal stance with the overall objective to maintain Public confidence and sustain economic activities among others.

The Minister informed that the FY 2021-22 budget is a milestone as it captures the essence of the Royal Kasho for Civil Service and Education Reforms and provides budget to embark on the reform initiatives.

During the  FY 2021-22, the domestic revenue is estimated to grow by 7% from a drop of -8% in the previous FY. Domestic revenue is estimated at Nu. 35,600 million of which 64% is tax revenue and 36% is non-tax revenue.

The positive revenue projection is based on the expected increase in tax revenues mainly attributed to improved direct tax performance and the indirect taxes such as sales tax, domestic excise duty, and green tax are also expected to grow proportionately.

The House referred the Bills to the Economics and Finance Committee for further deliberation. The Committee is scheduled to report back its finding and recommendation to the House on 8th June 2021.

Earlier on May 25, the Finance Minister, Lyonpo Namgay Tshering, presented the National Budget (Appropriation Bill 2019-2020) and the report on the budget of the previous Fiscal Year to the National Assembly.

The Finance Minister reported that the main objective of the budget is to ensure economic growth and stability and as a means to achieve the objectives of the 12 FYP.

Reporting on the Annual Budget for the FY 2019-20, the total resource estimate was reported at Nu. 54, 619.179 million with a total estimated expenditure of Nu.61,197.307 million. Fiscal deficit was reported at 3.04% of the GDP.

The Supplementary Appropriation for the FY 2018-19 was submitted for Nu. 1,627.410 million and the revised budget amounting to sum not exceeding Nu. 49,325.539 million upto period ending March 2019.

The Finance Minister reported that the government had introduced new initiatives in education and health sector by removing cut off points for the class X and introducing scholarship for class X students, introduced Day feeding program in a 115 rural school and started implementation of Flagship Programs.

The government has also made major reforms to strengthen the public finance management by introducing new systems. It is also looking to broaden the tax base.

It was decided that the Economic and Finance Committee will review the Budget Report and submit its Review Report to the House after 10 working days.