…trade deficit, an old economic challenge, heats the economy again

Thukten Zangpo

Water Male Tiger Year: Economy – The Water Male Tiger Year 2022 was challenging for the Bhutanese economy. As the economy was getting better from the headwinds from two years of the pandemic, the new variant of Omicron threatened the economy once again at the beginning of last year.

This was followed by Russia’s invasion of Ukraine on March 24 last year marking one year as of yesterday. This dimmed the global economy including Bhutan’s forecast, coupled with the persistent inflation, particularly for food and energy.

The country’s old economic challenge started to heat the economy again in the Water Male Tiger Year.

The surging import bill was painful for the economy, creating a massive trade deficit besides dwindling the country’s foreign currency reserves.

Import bill rose to Nu 93.03 billion (B) as of September last year, surpassing the year’s import of Nu 90.23B in 2021, according to the finance ministry.

This further widened the country’s trade deficit to Nu 48.14B in September last year. It saw an increase of Nu 15.9B from 2021.

Finance minister Namgay Tshering said that the country’s trade deficit is a chronic problem and should be fixed in this situation rather than focusing on the country’s economic growth or gross domestic product (GDP).

He added that the country is facing critical challenges today because of tightening financial conditions globally, staggering inflation, and USD appreciating against Ngultrum.

The prices of goods and services measured in the consumer price index increased by 5.64 percent in 2022 compared to the previous year. Food prices contributed to about 34 percent and non-food contributed to 66 percent of the overall inflation.

The Ngultrum value to the USD weakened by about 12 percent from January last year at an all-time high at Nu 84 per USD as of December last year.

Prime Minister Dr Lotay Tshering said such a trade deficit could take long years for the country’s economy to recover because Bhutan is an import-dependent country.

The trade deficit has plummeted the country’s foreign currency reserves by over 37 percent to USD 773.2 million (M) as of November last year compared to the same month the previous year.  It is able to meet 13.9 months of the country’s essential imports.

The Royal Monetary Authority and the government came up with various measures to address falling foreign currency reserves.

From ban of import of all vehicles except utility vehicles, heavy earth-moving machines, and agriculture machinery from August 19 last year and RMA revising the foreign exchange quota for travellers on February 6 this year.

Lyonchhen said that the country’s economy is going through rough times in Bhutan, and globally.

However, he added Bhutan is in a comfortable position because there was no massive damage during the pandemic times, and Bhutanese was able to go on with normal life.

The Bhutanese economy is also shielded because the Indian economy is resilient, Lyonchhen said.

The finance ministry projected Bhutan’s economy to grow by 4.78 percent in 2022 as economic activities picked up supported by expansionary fiscal policy, monetary support, and progressive relaxation of containment measures.

Moving forward

With surging import bills, the Water Female Rabbit Year will not be good for the economy.

The year could see more stringent import restrictions on non-food items if the country’s reserve position does not improve or continues to decline.

As required by the Constitution, the government has revised the 12 months’ essential import value of 2023 for the normal period at USD 603M and USD 464M under the critical period.

There is a possibility that the government could suspend construction loans and put a ban on the import of furniture, processed meat and food items, junk foods, alcohol, and LED television.

For the medium-term, the government would have to explore concessional borrowings since graduating from the list of least-developed countries’ status by 2023 means grants inflow will substantially decline.

On economic growth, the World Bank in its “Global Economic Prospects” report has projected that Bhutan’s economy to grow by 4.1 percent in this fiscal year 2022-23. It was revised down by 0.6 percentage points from the World Bank last year’s June projection of 4.7 percent.

For the fiscal year 2023-24, the Bank forecasts Bhutan’s economic growth rate at 3.7 percent. The Bank stated that slower domestic demand recovery because of high inflation and lower hydro investments are expected to decelerate growth.

It added that tourist arrivals are expected to remain subdued because of weaker consumer confidence globally and the new tourism policy, which increased the sustainable development fee three-fold for international tourists.

According to the finance ministry, Bhutan’s economic growth rate is projected at 4.83 percent in 2023.

The economic growth of the neighboring country, India, is expected to be 6.9 percent in this fiscal year, revised down by 0.6 percentage points from June last year’s projection.

The global economy is projected to grow by 1.7 percent in 2023 from the 3 percent expected six months ago.

The World Bank stated that new adverse development—higher than expected inflation, abrupt rises in interest rates to contain it, a resurgence of the Covid-19 pandemic, or escalating geopolitical tensions could push the global economy into recession.

The Bank warns that the sharp, long-lasting slowdown of economic growth would hit developing countries hard.

Besides, Bhutan’s economic dependence on imports of both oil and food prices is rising, annual inflation is projected to remain elevated at 5.7 percent in the current fiscal year 2022-23 and 5.2 percent in the next fiscal year 2023-24.