KP Sharma
The government has launched the much-anticipated first phase of the Economic Stimulus Programme (ESP), sparking hopes for economic recovery. However, hurdles in accessing support exist, as many individuals face confusion and mixed messages regarding loan procedures.
The Financial Institutions Association of Bhutan (FIAB) has issued implementation guidelines and established clear criteria for individuals seeking to benefit from the scheme. However, confusion has arisen due to conflicting information from politicians and party supporters, leading many to question their eligibility as the official criteria often contradict public statements.
A ruling party MP posted on social media that loans under Nu one million do not require a business plan, project proposal, or mortgage. He explained that the scheme is primarily intended to support farmers, which has further contributed to the confusion among applicants.
ESP, a key election promise of the ruling government, is set to inject Nu 5.3 billion into financial institutions to help rejuvenate the economy. It specifically targets agriculture, livestock, production, and manufacturing for cottage and small industries (CSIs), as well as medium-scale enterprises.
Experts suggest that the challenges encountered in the first phase of the ESP could be addressed in future disbursements to more effectively support beneficiaries.
Former finance minister Namgay Tshering said that the responsibility for achieving the ESP’s objectives now lies with financial institutions and the Royal Monetary Authority (RMA).
He pointed out that the Nu 5.3 billion allocation for concessional credit lines and reinvigoration financing poses challenges, particularly since the interest rates are well below the banks’ minimum lending rates (MLRs) and collateral requirements have been waived.
He cautioned that these factors could distort traditional lending portfolios and trigger a surge in ESP applications.
This revision enhances the flow while preserving the original points.
“I hope financial institutions are prepared to manage this well-intentioned disruption,” former minister said, recommending that financial institutions and the government could engage in dialogue to develop effective strategies.
He further highlighted the risk of moral hazard due to the concessional nature of the loans, questioning whether a more complex loan application process would help address issues in the future, particularly concerning moral hazard and inequality.
To mitigate these risks, he suggested that loan appraisal committees must thoroughly assess the broader economic impact of each application, ensuring that loans contribute to domestic growth.
He also raised concerns about potential moral hazard, noting that many ESP loan applications might come from separate entities operating under the same management.
On a positive note, former minister Namgay Tshering praised the phased approach of the stimulus, stating at it provides room for learning and adjustment.
For Phase II, experts recommend adopting a ‘blended financing’ model to broaden the ESP’s reach. This approach would allow financial institutions to offer loans at or above the Minimum Lending Rate (MLR), reducing the risk of market distortion while improving the programme’s long-term effectiveness.
A proposed 70:30 funding ratio—where 70 percent is government-backed and 30 percent financed by banks—could strike a balance, enabling banks to benefit while ensuring strong government support. He also mentioned the potential reintroduction of a “Government Guarantee” to secure the loans.
An economist and former parliamentarian stressed the importance of maintaining prudent lending practices, as mandated by the Royal Monetary Authority (RMA) and industry standards. He expressed concerns over restricting loans to import-substitute products in agriculture and manufacturing, areas where Bhutan lacks a comparative advantage.
“Our production costs remain too high, even with a concessional 4 percent interest rate, making these projects non-viable for banks, despite having all the necessary documentation,” he said.
The economist proposed a broader reduction in interest rates and increased market liquidity, allowing banks and market dynamics to determine viable sectors.
“Cherry-picking sectors misaligned with market realities creates problems. If the goal is to reduce agricultural imports, we must also consider tariff barriers for imported goods,” he said.
Another major issue he raised was Bhutan’s currency peg to the Indian Rupee. He argued that maintaining this peg made imports cheaper, which adversely affects the balance of payments (BOP) and keeps it in deficit.
“We are left with no choice but to either borrow from India or secure grants to fill this gap and uphold the currency peg,” he said.
A party president criticised the government’s decision to follow processes that have previously proven ineffective, such as routing the stimulus through financial institutions with lengthy procedures.
He expressed concern over the limited involvement of local governments in the project, despite their familiarity with viable initiatives in their regions.
“The ESP could have had a greater impact if it were fully or partially managed by local governments or NGOs, empowering those on the ground to lead,” he said.