The country’s GDP growth is projected to decelerate to 4.8 percent in 2019 fiscal year, according to the International Monetary Fund’s article IV consultation report.

The growth, as per the report, reflects a sharp decline in public investment as the 2019 interim budget implies a sharp fiscal withdrawal. However, the report states that growth would be moderated with the coming on stream of the Mangdechhu hydropower plant to about six percent in the 2019-20 fiscal year. This is projected to further accelerate in 2021–22 fiscal year due to the expected coming on stream of two other mega hydropower projects.

Given Bhutan’s infrastructure needs, the IMF executive directors called for higher capital expenditure supported by additional domestic revenue and a modest increase in domestic financing.

To do so, the country has commitment to implement a broad-based GST by July 2020 followed by curtailment of tax exemptions. The report highlighted that the country should seek to rationalise and gradually curtail the use of tax exemptions (mainly indirect taxes), which were estimated to amount to about three percent of GDP in 2017.

Due to the withdrawal of capital expenditure in the interim budget, IMF stated that it limits the possible increase in capital spending  in the short term. However, the IMF also saw a scope to raise capital spending by about two percent of  GDP annually on average over the medium  term and recommends a more even spending  path than implied in the draft 12th FYP.

The report also states that higher  capital spending could be supported by  additional domestic tax revenue mobilisation as well as a modest amount (about 1 percent of GDP annually on average) in domestic financing. “This alternative fiscal path would allow the continued expansion of much needed productive infrastructure and support higher growth,” it states.

The IMF indicated that the sharp contraction in capital spending in FY 2019 was a matter of concern, but it also acknowledged that it was constrained by the electoral cycle, limiting expenditures to essential activities and spillovers from the 11th FYP.

On the positive side, the IMF expects the country’s current account balance and reserve coverage to improve due to a decline in hydropower-related imports and a sharp increase in hydropower exports.

On October 26, 2018, the executive board of the IMF concluded the Article IV consultation with Bhutan. Bhutan joined the IMF in 1981.

When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance.

While the country surveillance is being conducted, consultations are held with the government and other stakeholders. This consultation is known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.   

Tshering Dorji