The government’s establishment of the stabilization fund of Nu 100 million is perhaps well intended for “rainy days”. Usually, a stabilization fund in the true sense of its definition and purpose refers to governments trying to insulate the domestic economy from large inflow of revenue surpluses generated from sale of oil or other Dutch Disease type proceeds, especially in the case of countries like Oman, Kuwait and Norway. Such an instrument is within the sphere of monetary policy rather than fiscal. It is designed to manage macroeconomic imbalances such as inflation arising from increase in money supply through windfall income.

In any case, with the corpus of Nu 100 million for stabilization, it is not clear whether such domestic currency denominated fund could effectively achieve macroeconomic stability in the face of exchange rate volatility, growing trade deficit, narrow revenue base and limited monetary policy implementation opportunity due to currency peg.

While stabilization fund in other countries is in convertible currencies and invested abroad, in our case it is in local currency and therefore has to be parked presumably in the Bhutanese banking sector whilst bearing little returns provides increased liquidity within the banking sector. Should the macroeconomic imbalances arise from lack of demand management (overheating), the parking of stabilization fund within the domestic banking sector would aggravate the problem.

Especially for many developing countries, the challenge at hand is how to mobilize resources for providing infrastructure, social development and poverty alleviation. We continue to rely on ODA for meeting reasonable level of our development financing both in the form of grant and concessional borrowing. It is opined that under given economic circumstances, establishment of a Stabilization Fund although well intended is not practical.  A country cannot afford to lock up its own resources and continue to borrow from abroad.

The annual cost of maintaining such fund is in the tune of 5-6% per annum assuming the government borrows from the market through issuance of T-bills. If this fund is spent now, the government would generate a saving of 5-6% indirectly in terms of interest payments.

One could also argue for maintaining stabilization fund in the form of INR denominations but even creating a rupee stabilization fund from our hydropower income does not make economic sense as we do not have surplus rupee earnings over our rupee expenditure experiencing huge trade deficits. Bhutan trade statistic figures reveal the country suffering a stark Nu. 44 billion negative trade. In addition, loan repayment requirements for hydropower investments will leave scarcely any inflow of INR while each year increasing imports from India by 23% demands larger pressure on the rupee. As of June 2016, the country holds rupee debt of 115 billion; a 46% increase from the previous year. Therefore, the intention to create stabilization fund in INR will also not route viable.

Though the intent is noble, but should the policy to save for the future value more significance at the cost of foregoing present needed public expenditure on roads, hospitals, school, bridges and rural development? Unlike in other countries where the fund is created out of budgetary and balance of payment surpluses, Bhutan is copying the same by setting aside funds from budgetary allocation as discussed in parliament when the country is smacked with unfavorable balance of payment situation. To report, the country’s total budget outlay for 2016-17 is estimated at Nu 54,380 million and runs a resource gap of Nu 5,487 million. Therefore, had it been created out of surplus budget like in other countries, then the extra savings and creation of reserve fund might justify although the efficacy of meeting its objectives may not necessarily yield intended positive outcomes considering fund size and currency denomination.

Current external debt is recorded at Nu 156 billion corresponding to an alarming 110% of GDP. With this situation, is it a rational economic decision to lock in funds borrowed at a higher cost than the interest it generates? Do we as a budget deficit economy possess the luxury to set aside funds bearing low interest earnings versus a higher cost of borrowings? One must underline postponing basic needed-expenditure at the present not only deprives public welfare and economic growth but allows purchasing value of money to depreciate both with increasing price of goods and services resultant to a net economic and financial loss.

Setting aside money as part of the stabilization fund might also send wrong signals to our bilateral and multilateral developmental partners. They might think Bhutan now has enough funds and no longer needs concessional loans.

The Reserve Bank of India has created the SAARC SWAP fund out of its surplus convertible currency reserve to the tune of US$ 2 billion to benefit SAARC member countries. Member SAARC countries, including Bhutan can avail of SWAP facility in case encountered by a macroeconomic situation. Therefore, the SAARC SWAP can serve as a regional stabilization fund.

Therefore, a stabilization fund of Nu 100 million is an insignificant amount for its intended purpose and may provide little safeguard to the Bhutanese economy for any rainy day as envisaged. Unless, the economy is in surplus both in the external sector and domestically in terms of fiscal surpluses, it would not be a wise economic decision to create such fund through budgetary provisions. Thus, one can conclude that even though debates have not achieved consensus on the efficacy or ultimate utility of a macroeconomic stabilization fund, the government does need to make strong and committed efforts in order to stabilize government budget, that is to smooth public service provision across the economic cycles, because this is the demand from the society, individuals, households as well as the private sector.

However, a rational policy and proper policy tools are not a panacea to cure all ills from governmental revenue shortfalls. The stabilization fund policy and relevant tools are perhaps the means, which must go through the human hands of implementation to be effective, that in turn lies ultimately in the domain of politics and politicians.

Therefore, the solution returns to the very basics of adopting fiscal discipline within the government and managing the private sector through well designed and administered private sector development policy. The efforts of the government under current situation should be fully geared to well manage the economy in consultation with the monetary authority and avoid macroeconomic imbalances.

As to the future, when the Government runs fiscal surplus, it could then establish a Stabilization Fund with reasonably endowed corpus fund to address any macroeconomic imbalances.  Until such a time, the solution is to work towards achieving both the internal balance and external balance even if it means lower growth for ensuring the economic sustainability in the long run.


Bhutan Kuen-Nyam Party