The country’s current account deficit, which is about Nu 36B in the red and forms about 23 percent of the economy size, continues to pose challenges for the economy.

The current account is a country’s trade balance, (net export) plus net income and direct payments. It measures international transfer of capital.

The Royal Monetary Authority’s (RMA) publication, Monetary Policy Statement 2017 says that since the external sector challenges are largely structural in nature, addressing the challenges will require concerted efforts from both fiscal and monetary fronts, including favourable sector-specific policies, reforms, and interventions.

Regarding the monetary policy, it says credit growth has a direct impact on the current account deficit because the country is highly import dependent. As a result, a large portion of any credit extended by the financial sector translates into imports, putting pressure on both international reserves and current account.

“Significance of managing the demand side factors using monetary policy tools becomes crucial,” the policy statement says. It also says that for a sustainable economic development, addressing structural challenges through financial inclusion is the key.

This will require building a favourable institutional and regulatory framework, mechanism for risk management, and ensuring the macroeconomic stability.

The RMA said that financial inclusion must be seen as being closely intertwined with the process of financial sector development.

The central bank is formulating a comprehensive financial inclusion and financial literacy policy.

Currently, the financial inclusion efforts are categorised into two phases. The first phase of financial inclusion is directed towards poverty alleviation. Under this initiative, RMA is undertaking numerous measures– identification of priority sector activities, promotion of microfinance institutions and agent banking, promotion of cottage and small scale industries (CSIs). Bringing informal money lender under the purview of financial sector regulations, and promotion of digital payment system in the country  is also one of the reforms. The minimum lending rate policy has also helped reduce the interest rates.

The second phase of financial inclusion will include implementation of priority sector lending policy, which will target important sectors such as agriculture and CSIs that have greater capabilities to become more enterprising and business oriented. It is also expected to promote youth employment opportunities and boost domestic production.

“The full potential of the CSI sector is yet to be tapped and explored. Constraints such as underdeveloped infrastructure, poor business development services, limited access of CSI to finance, and ineffective and poorly coordinated institutional support framework continue to impede the development of the CSIs,” RMA said.

To address these problems, the RMA formulated rules and regulations for CSI Banks to develop, promote, assist and support the establishment, expansion and improvement of CSI enterprises by granting credit facilities to foster job creation and income generation.

RMA is also working to institute comprehensive corporate governance systems that can be applied uniformly across all the financial institutions and help the financial institutions reach the last mile of financially un- and under-banked sections of the population.

RemitBhutan was launched to boost inward flow of foreign currencies. A year after it was launched, the country received USD 2M remittance from this initiative.

However, the monetary policy alone cannot help the economy, if the fiscal policy, which is in the hands of the government, is not attuned.

Expansion of fiscal deficit, owing to large increase in current expenditure, translates into increased financing for consumption-led imports.

“Since our economy is largely influenced by public investment, the government will be in the best place to influence the supply front dynamics and minimize the potential risk associated with undesirable spending,” said RMA.

Consolidation of tax and appropriate fiscal reforms that support the inherent economic challenges, the policy statement stated, will be beneficial for the economy to pave the way forward for a sustainable path of economic development. “More importantly, focus on addressing supply bottleneck and employment generation efforts of the government keeping in view the graduation to middle income country and potential withdrawals of the donor are some of the associated challenges over the medium to longer term.”

The government, as per the RMA’s statement, could play a vital role in supporting priority sector lending activities through establishing a special window facility for farmers and other priority sector borrowers that guide and provide technical backstopping.

The central bank has recommended the government to introduce endowment fund for crop and livestock conservation.

Tshering Dorji