Economy nosedives while inflation peaks

The economy experienced largest contraction in 2020 triggered by the COVID-19 pandemic.

By Phurpa Wangmo

Further, the growth is expected to drop to an all-time low of -6.3 percent as output from tourism-related services, construction, and manufacturing sectors deteriorated.

While various containment measures including two nationwide lockdowns effectively controlled the number of COVID-19 cases in the country, economic activities almost came to a standstill.

The service sector experienced its steepest decline of 7.9 percent in decades as demand in consumer-driven sectors like retail, accommodation, and transport were affected. Industries that rely on foreign labor and raw materials led to a decline in industrial output further aggravated by a fall in demand, both international and domestic.

Total public debt stands at Nu. 224,909.609 million at the end of March 2021, accounting for 120.5 percent of GDP. Of the total public debt stock Nu. 215,822.826 million is external debt and Nu. 9,086.783 million is domestic debt.

Hydropower debt amounts to Nu 160,035.778 million, constituting 74.2 percent of total external debt, while non-hydro debt is Nu 55,787.048 million, accounting for 29.9 percent of total external debt.

Further, the economy entered a brief recessionary period in 2020 as the growth estimate was downgraded from -2.1 percent to -6.3 percent. As such, the economy loss in 2020 from economic sectors relative to 2019 is estimated at Nu 4,524.046 million.

On the supply side, scaling up of investments through government capital spending is expected to generate economic activities and induce private investment growth.

The fiscal stimulus of allocating a higher share of the capital budget, about 33 percent of the plan outlay for FY 2021-22 budget, is expected to boost government construction besides inducing aggregate demand. Both the public and private demand is expected to rise in the medium term as economic activities pick up, resulting in increased export and import of goods and services.

However, the severity of the impact was largely offset by exceptional performance in the electricity sector with substantial increase in export earnings in 2020. This is according to the latest findings released by the Dept. of National Budget, MoF.

The findings state that the impact of the COVID-19 pandemic continues globally with far reaching consequences on lives and economy. However, Bhutan has been fortunate as His Majesty The King, with deep compassion and extraordinary leadership has worked tirelessly to safeguard people from the devastating impact of the pandemic.

“Under the guidance of His Majesty, the government placed highest priority to reinforce containment measures for not letting the guards down,” it states.

While the effective containment measures including lockdowns had contained the spread of the virus to a large extent, however, the economy experienced the highest share of contraction triggered by the pandemic during 2020, as the growth estimate plummeted to -6.3 percent.

While total resources are estimated at Nu 56,765.582 million, of which domestic revenue is Nu 35,600 million, external grants are Nu. 20,525.311 million, and other receipts is Nu 640.271 million.

For the FY 2021-22, with the vaccination drive and positive global outlook, growth of 4.1 percent has been projected.

“The Royal Command to continue the DGRK for another 15 months has further enhanced public confidence for ensuring livelihood and wellbeing of people during such unprecedented times. The fiscal and monetary measures have to a certain extent, ensured business continuity and stability in the economy,” the report states.

Till date, the report states, the Druk Gyalpo’s Relief Kidu has granted Nu. 2,863.545 million in monthly income support including De-suung skilling program. About 45,766 individuals received the Kidu, which also include Child Support Kidu of Nu 70.890 million.

Further, it states the government will review the existing measures and implement targeted interventions to stimulate economic activities and boost private sector participation.

In addition, in order to enhance access to credit, the government has established the National Credit Guarantee Scheme (NCGS) as a counter-cyclical policy measure in response to the pandemic.

Under the NCGS, the government extended guarantee to SOE Banks for supporting viable projects that generate employment besides promoting exports and substituting imports. During the FY, NCGS will be provided all necessary support to upscale operation as a strategy for economic recovery.

It states that in principle, the government has committed to extend guarantee up to Nu 3,000 million in favor of participating Banks (BOBL, BDBL and NCSIDBL) for a period of three years.

“To ensure maximum success of NCGS, a dedicated Support Facility is being hosted at the NCSIDBL. The Support Facility will handhold, monitor and guide projects approved under NCGS,” it states.

According to the report, as of 6th May, 2021, 81 projects have received the guarantee coverage. Of the total, 30 were under Agriculture sector, followed by 29 under production and manufacturing sector and 22 under service sector.

The total loan for the projects stands at Nu. 274.500 million with the government Guarantee Coverage amounting to Nu. 174.120 million

The report further states that, to a large extent, the unemployment situation have been eased by the Accelerated De-suung Integrated Training Programs initiated under His Majesty’s leadership, as many unemployed youths were engaged in various specialized programs.

To improve the economic health, for the first time, the government states it had provided capital budget without ceiling at the agency level. “Such reform facilitated the agencies in receiving adequate budget for supporting priority activities for a resilient economic recovery.”

Further, the system of providing Annual Grants to the LGs and Block Grants to other Budgetary Bodies will also be continued during the FY as it promotes ownership with flexibility and accountability.

“Considering the revenue performance and the constitutional requirement of having to meet the recurrent expenditure from internal resources, the government has adjusted the recurrent budget within the estimated domestic revenue. In this regard, the government will continue to implement measures to contain the recurrent expenditure within the estimated domestic revenue and maintain Mangdechhu Hydro-power Project (MHP) under profit transfer modality,” it states.

Meanwhile, in order to simplify and restructure the customs duty to promote trade, the government has decided to rationalize the customs duty rates. It is stated the customs duty rate bill will be presented for consideration by the house.

The customs duty rationalization is expected to enhance compliance, eliminate direct human interface and improve revenue collection over the medium term. In addition to the CD rationalization, development of e-CMS is at an advanced stage, which will facilitate trade and simplify customs clearances.

The Royal Kasho on Civil Service reform has underscored the importance of restructuring the budget process, financial norms and procurement system to fast track our transition towards a knowledge based and tech-driven economy.

As the pandemic continues to impact health and livelihood and to prepare for any eventualities, the Government has earmarked a budget of Nu. 3,000 million, of which Nu, 2,000 million has been kept under General Reserve and Nu. 1,000 million is being mobilized to support quarantine, COVID-19 test kits, PPE, vaccines.

Meanwhile, inflation has accelerated in the second half of 2020. From the second half of 2020, commodity prices have significantly increased owing to supply disruptions and high food inflation, reaching a peak of 8 percent in September before falling to 7.7 percent in December.

The report states that inflationary pressure has been building up in recent months as domestic and imported food prices continue to rise due to limited supply and higher transport costs.

While the non-food price remained modest at 1.2 percent, the food price increased to 11.1 percent in 2020 over the previous year of 3.4 percent, mainly attributed to increase in the price of vegetables, dairy and poultry products. As a result, the annual inflation in 2020 increased to 5.6 percent from 2.7 percent in 2019.

As per the IMF estimates (April 12, 2021), the global economy in 2020 is estimated to contract to -3.3 percent, lower by 6.1 percentage points than 2019. Whereas, with the anticipated availability of vaccines by summer 2021 and additional fiscal stimulus in a few large economies, the global growth is projected to rebound to 6.0 percent in 2021 and 4.4 percent in 2022.