The Annual Report 2019 by the Royal Monetary Authority (RMA) highlights recent macroeconomic development, medium term economic growth prospects, RMA’s interventions, medium term challenges and research and empirical studies on selected macroeconomic issues.
Report shows the slowdown in economic growth to a 4-year low of 3.03 percent in 2018 was largely driven by drop in public investment, and decline in hydro-electricity production with subsequent impact on domestic savings and investments.
Hydropower and government expenditure have traditionally been the two important drivers of the economy. However, reports states that in 2018, the reduction in capital expenditure in the interim budget during the transition period between the two governments, along with decline in hydropower investment, as well as reduced hydropower production, contributed to the economic slowdown.
The increase in domestic credit has sustained the economy in 2018, states the report, adding that driven by growth in tourism, increased in domestic credit financing, trade and restaurant, transport and communication, and financial activities as well as housing, all increased in 2018.
Report points to the good growth in the agriculture sector, which was due to targeted policy intervention undertaken in the recent past. In addition, increase in domestic credit has also been accompanied by an increase in non-performing loans (NPLs) driven by tourism sector and the trade and commerce sector.
Meanwhile, on the fiscal front, reports shows that the overall budget deficit as of March 2019 stood at Nu 3.8 billion (bn). The decline in resources was mainly due to weakening domestic revenue collection from GST implementation in India and decline in external grants.
“The pace of public debt accumulation accelerated marginally to Nu 184.18 bn. However, their relative shares in terms of GDP decreased by 4 percent respectively,” report added.
Despite accommodative economic policies, external imbalances in terms of current account deficit further increased to 24.5 percent of GDP in Fiscal Year (FY) 2018-2019.
The report states that although the global financial markets remained volatile in the Emerging Market Economies, triggered by elevated crude oil prices, trade frictions and currency depreciation, however, the macroeconomic outlook for Bhutan remains favourable over the medium term.
The economy is projected to grow at 6.4 percent in FY 2019-2020, supported by full commissioning of MHP. “Keeping in view inflationary developments in India, the medium-term headline inflation is projected at 5 percent during FY 2019-2020, while considering the anticipated domestic inflationary pressure from recent pay hike of civil servants and rising domestic food inflation,” report adds.
Similarly, the fiscal deficit is projected to remain at around 3.0 percent of GDP in FY 2019-2020, as a result of increase in both capital and current expenditure during the period.
Meanwhile, RMA has taken various interventions towards building a strong and resilient economy. Works are underway to operationalize and strengthen E-commerce, Crowd funding, Jabchor and credit guarantee schemes.
RMA has also embarked on digital financial inclusion and digital transformation of the financial sector, and likewise, they have lot more interventions. In addition, on the policy front, several regulatory and supervisory measures were taken during the year to strengthen the soundness of the financial sector.
Inflation rose moderately to 2.7 percent in June 2019 from 2.6 percent in June 2018 due to favourable supply, especially in the agriculture sector, and moderate increase in consumer demand.
Unlike in the past, the modest rise in price level was fuelled by underlying demand pressure on non-tradable goods owing to increasing house rent and transportation prices. While, on the other hand, decelerating inflation in India subdued imported inflation, which constitutes more than 52 percent of the consumer basket.
The enhancement in agriculture production, on the supply front and moderate consumption growth, resulted in lower inflation of food prices, from 5.1 percent in June 2018 to 3.1 percent in June 2019. However, non-food inflation, which comprises about 60 percent of the total consumer basket, elevated to 2.6 percent in June 2019.
As per Royal Monetory Authority’s (RMA) annual report 2019, with slowing inflationary pressure in the region, particularly in India, the imported inflation comprising about 52 percent of total consumer basket, experienced lower inflationary pressure compared to domestic inflation.
Despite persistent increase in supply of residential housing in urban areas, house rents experienced constant rise from January 2019. A speculation in civil service pay and allowances revision had a corresponding effect, and therefore, increasing housing rental to 3.1 percent in June 2019.
Similarly, transportation charges have increased by 2.5 percent from a negative of 1.2 percent in June 2018, although there was only a moderate increase in fuel prices. House rent and transportation were the main factors that impacted prices of non-tradable goods under non-food category, the report adds.
Meanwhile, reports states that imports from India constitute more than three fourths of imports and the slowing inflation in India towards June end 2019 has resulted in lowering food inflation in Bhutan.
Despite subdued domestic food inflation and favourable imported food prices, non-food prices in the domestic market increased to 3.5 percent in June 2019. During the period, housing and transportation prices in the domestic market increased by 6.0 percent and 7.5 percent respectively.
The acceleration in housing, transportation and restaurant services are the key factors for uptick in core inflation. Unlike other tradable goods, prices of non-tradable goods and services have limited the scope for prices adjustment through substitution effect between domestic and foreign products.
Report states that inflation targeting is increasingly becoming the focus of macroeconomic policy program in developing economies, and this is due to price stability being chosen as one of the most important monetary policy objectives.
“Existing literature on inflation and economic growth indicates that there is non-linear relationship between inflation and GDP growth. It is widely recognized that a higher inflation is harmful to economic growth and lower inflation supports growth,” states the report.
High inflation negatively and strongly impacts the lower income group, distorts market pricing and financial assets valuation, and degrades central bank’s policy credibility on price stability. In addition, reports states that given the policy relevance on improving the living standard of the people through enhanced economic growth and price stability, finding the growth-maximizing level of inflation for Bhutan is essential.