His Majesty the King’s address to the nation highlighted the ever-increasing care and love Bhutanese have been receiving for more than a century. A Kidu programme was rolled out to help people overcome the current situation: establishing a national resilience fund of Nu 30 billion, deferring the mortgage payment, and waiving off interest payment for three months.

As an economics scholar and corporate lawyer, we find that to be a novel macroeconomic policy. It is fiscal policy and monetary policy at its best to enhance the welfare of the people. The policy attempts to maintain the same level of income and reduce cost considering wider impact of the pandemic. Individuals and businesses have the same pre-pandemic level budget constraints thereby improving the purchasing power and the welfare of consumer and producers.

The current economic situation, with the mobility of labour and capital constrained, international trade and tourism on halt, and foreign aid severely disrupted because of the bad economic conditions of donor economies, resembles a closed economy.

Thus, the economic shock runs from goods market to factor markets to capital market. However, if left to the market to adjust, it would force many employees out of job and bankrupt employers, especially small and medium. That in turn could severely affect the financial market causing chain reaction. Therefore, Bhutanese must work together to maintain stability of the economy while fighting the pandemic.

Market stabilisation

In a stable market, the amount of goods supplied in the economy along with the stocks from previous period should be equal to the goods demanded by the overall consumers and investments required. Thus, under temporary economic conditions, market would clear when the return on the factors of production is equal to the marginal productivity of the factors of production. However, under the current situation, because of the shock, the return on factors of production is severely diminished thereby creating disequilibrium in the market. Hence, the market will clear at a price where more producers are not able to supply their goods or demand is inadequate. Most consumers will not be able to buy as desired due to income loss.

The Kidu fund addresses the problem from supply side and demand side using both fiscal policy and monetary policy. Under the current circumstances, unless the society makes concerted effort, the burden of cost will be exerted on the national resilience fund.

Sentiment adjustment should bring the overall cost in the economy down, which would mean that despite the loss in income both consumers and producers would be able to produce and consume at same level, thus maintaining same level of welfare.

From the fiscal standpoint, without negotiated adjustment, it would burden the government, not just on account of the stimulus package but also from loss in tax revenue. Even after the pandemic, it is unlikely that the market and consumer sentiments will immediately return to pre-pandemic levels. That requires the government to roll out more fiscal policies. Such fiscal burden will be carried over for significant period, which in turn would impede developmental activities. Such adjustment to maintain temporary market equilibrium will give more fiscal space for further stimulus efforts at later stage.

Systematic adjustment, by applying the 80/20 principle (Pareto principle), must pick up about 20 percent of the commodity bundle that makes up for 80 percent of the household and business expenses, primarily focusing on the fixed cost. In this respect, rent, interest rates and wages become the major component of cost for any household or business. The rent is a function of interest rate and, therefore, interest rate serves as a very important policy tool, as it is the returns on investment or capital that is addressed through the Kidu.

It was heartening to see some building owners voluntarily reducing or waiving off the rent for a few months. But people’s incomes are drying up at much larger scale in tourism, retail or small and medium enterprises, workers in ‘gig economy’ and informal economy. Therefore, such efforts ought to be replicated widely to account for the income shock. With the Kidu Fund, real-estate owners should now be able to make sentiment adjustment by lowering the rent.

Further, public sector being the largest employer, the cost reduction in the economy needs to be initiated from the public sector employees. RCSC and some public corporations have already donated to the Covid-19 fund. But one-time donation might not be enough. As a quick cost reduction policy, Ministry of Finance (MoF) could set up bonds where certain percent of monthly wages of public sector employees is invested in the bonds for the period of sentiment adjustment at nominal coupon rate. This public sector employees’ offer will redistribute the incomes and provide liquidity to small producers and service providers at low cost. Considering that the cost of entire economy is bought down, it would increase the purchasing power. 

Capital flows

While incorporating such expansionary fiscal and monetary policy, there is possibility that because of the trilemma, the government and RMA might come under pressure of maintaining external account balance. With earnings from tourism disrupted and hydropower export shrinking, there will be stress on external account.

Remittance from abroad: Remittance from Bhutanese working and living abroad will play a crucial role in balancing the external account. Global sluggish economy caused partly by this pandemic, hurting major economies, might not find Bhutanese abroad at their best. However, a collective effort in shouldering responsibility will see our nation through this pandemic. Repatriation of money now, by formal means including Remit Bhutan, would help in balancing the external account.

Bonds for past visitors: Bhutan made many friends around the world over the years. Through our tour operators, a closed bond market can be established, where they could invest with various maturity dates. This instrument will enable those who want to help Bhutan.

Future contract for tourists: We can reinvent and use future contracts—a concept widely used in commodities market—in the tourism industries. Rather than physical goods, the delivery at the end of contract in the future will be tourism service. It can be packaged like the current tourist package targeting future offseason periods but discounted at present value or perhaps a bit lower rate to provide attractive investment. In other words, tour operators and hotels will be using future income to sustain their operation under current circumstances. Such earnings could be tax-free for business operators while executing the contract to reduce the future burden.

One welcome development is the recognition of the need to boost agricultural production. Perhaps this is the right time to revisit the agriculture sector ranging from method of production, supply chain management, transporter, market dynamics, yield, role of economic agents, including state-owned enterprises. At the same time, insurance companies could to explore the possibility of introducing unemployment insurance scheme.

Contributed by

Pema Dorji, 

Ph.D. Candidate, Graduate School of Economics, Nagoya University, with inputs from Namgyel Wangchuk, Lawyer. (zamlingnelam@gmail.com)