The Bhutanese Leading the way.
For months now, increasing number of credit and cash starved Bhutanese citizens, businesses and entrepreneurs have only read or heard about the broad generalities of the Nu 5 bn Economic Stimulus Plan (ESP) which is also expected to be approved by the National Assembly, as part of its Supplementary Budget.
That long wait for details, for the nuts and bolts, is now over as this paper got access to the detailed ‘Economic Stimulus Plan Implementation Strategy’ submitted recently to the government by the ESP Task Force.
Of the Nu 5 bn fund, Nu 4 bn would be given to Financial Institutions (FIs), to give as loans to jump start various businesses.
The strategy lists out some priority sectors under manufacturing and services that would be given preference for the ESP loans.
The priority sectors, however, are an advisory from the government and are not strictly binding. What would be binding are the three main principles that the loans would have to ensure, that there is import substitution, encourage export promotion and employment for Bhutanese.
Priority sectors
The priority sectors for loans under agriculture area are livestock, agriculture, forestry, fishery, food processing, beverages, textile, wood based, pharmaceuticals, minerals products, base metals, plastic products, chemical products and waste recycling.
For the services area, the priority areas are education, health, tourism and hospitality, IT and IT- enabled services, professional services, motion picture, construction, transport, personal and household services. Under agriculture, the specific areas are growing of cereals, fruits, vegetables, spices, aromatic, and drugs. For livestock, the areas are dairy farming, piggery, poultry, while for forestry, it’s for bamboo plantation and harvest.
Food processing includes the processing and preservation of meat, fish, crustaceans, mollusks, fruits, vegetables and manufacture of vegetable and animal oil fats, dairy products, noodles, macaroni, prepared meals and animals feed.
Beverages, as the name suggests, would include manufacture of beer, fruit drinks, mineral water and other bottled waters.
Textiles would compose of weaving, manufacture of made up textiles and cordage, rope, twine and netting.
Wood based industry does not only include carpentry, but also manufacture of charcoal. Pharmaceuticals include manufacture of pharmaceuticals, medicinal, chemical and botanical products.
Mineral products include loans for mining of minerals for export, producing sand, aggregate and stones for building materials, manufacture of porcelain and ceramic products, articles of concrete, cement and plaster and cutting shaping and finishing of stone.
Base metals include manufacture of structural metal products, fabricated metal products, cutlery, hand tools and general hardware.
Plastic products would mean manufacture of finished plastic goods like furniture, kitchenware, packaging material, etc. Chemical products include manufacture of paints, varnishes and similar coatings, printing ink, mastics, soaps and detergents, perfumes and toilet preparations.
Under services, education would mean loans for colleges, vocational and training institutes. Health includes diagnostic services and high-end specialized services.
Loans for tourism would come for upgrading hotels to three stars and above and new tourism products.
For IT services it would be for business process outsourcing and data centres and professional services would mean consultancy services in joint venture with reputed outside firms.
Under construction, loans would be given to companies providing specialized services such as plumbing, electrical installation, masonry, heating and cooling, finishing works, on site fabrication, etc. It would also be for companies leasing equipment for mechanized construction.
Transport loans would be for mass urban transport, bulk freight transport and logistics for transport and marketing of agro, livestock and horticulture products. Loans would also be available for health and fitness facilities.
How would you get the loans?
Of the Nu 4 bn up for loans, the government will inject Nu 2.1 bn into the banks as subordinate debt for 10 years. As per this, Bank of Bhutan would get Nu 500 mn, Bhutan National Bank would also get Nu 500 mn, Bhutan Development Bank would get Nu 430 mn, Royal Insurance Corporation of Bhutan would get Nu 250 mn, T- Bank would get Nu 150 mn, Druk-PNB would get Nu 150 mn, and Bhutan Insurance Limited would get Nu 120 mn.
The injection of the this much money, according to the report, will improve both the Capital Adequacy Ratio (CAR) and overall liquidity of the FIs and this, in turn, is expected to improve access to credit.
Earlier, many banks were unable to meet CAR regulation set by RMA and so stopped lending while a few who had the CAR norms like BNB did not have a comfortable liquidity. Many lacked both CAR and liquidity though.
The FIs will pay an annual rate of six percent for a period of 10 years and then the lump sum principal after 10 years. No limits will be imposed on the fund ceiling as well as the lending rates and FIs are expected to carry out due diligence and viability assessment to determine financial soundness of the proposals. The FIs will also be fully responsible for the risk and return of the investment made and risk would not be shared by the government.
According to the report, as of June 30, 2013, the FIs had an excess liquidity of Nu 10.57 bn which will now increase by Nu 4 bn once it is pumped into the FIs.
Though credit will easier to access, the banks will still have to follow RMA norms and regulations on lending to various sectors.
Nu 1.9 bn in revolving fund
What is generally known about the Nu 1.9 bn revolving fund is that Nu 1.5 bn will be for cottage and small industries and Nu 400 mn for non-formal rural activities to be looked after by the Business Opportunity and Information Center (BOIC).
The strategy, going into greater details, says that for the Nu 1.5 bn cottage and small industries fund, the maximum ceiling of funding will be Nu 8 mn per project with a debt equity ratio of 4:1. There will no collateral requirement and financing will be dependent on viability of the projects. The report expects an average of Nu one million per project, though it also expects several projects to cross this average. The interest rate is at four percent.
The main purpose of this fund would be to provide credit to small and cottage industries to foster entrepreneurship, stimulate economic activities, add value to domestic resources and create employment.
To promote the non-formal activities in rural areas, the Nu 400 mn part of the revolving fund will be used as baseline financing for individuals and cooperatives engaged in agriculture, livestock, forestry and fishery.
This fund shall be the most concessional collateral free support provided to individual and cooperatives. A household or cooperative may be extended this fund based on the practicality of the proposal a sum up to the maximum of Nu 100,000 per project. This is expected to translate to around 4,000 projects going by the size of the fund. The interest rate is at four percent.
There is also a provision for special essential infrastructure projects where upon approval from the Cabinet, the government may implement special infrastructure projects to be implemented by the government directly or in partnership with a private company. These could be like animal feed, cold chain facilities, etc. It could also include the converting vehicles into electric vehicles to save on fuel consumption. The funds could be used from unused revolving funds and adjusted accordingly.
Nu 1 bn in special support schemes
Students pursuing higher education in Bhutan or India would be eligible to concessional education loans to be provided annually based on criteria identified by the education ministry. The total fund would be Nu 150 in five years coming to Nu 30 mn every year.
The help the senior citizens to lead a dignified life, a Nu 60 mn per annum would be provided as post retirement allowance for senior citizens without post retirement pension. This would amount to Nu 300 mn in five years. The Office of the Gyalpoi Zimpon will determine the criteria including the number of beneficiaries and amount per person.
For out of school youth till they are gainfully employed, monetary support will be extended under a pre-employment support scheme for 10 to 12 months. This could take the form of an internships, national service and apprenticeships. This has a Nu 550 mn provision for a five-year period. The Ministry of Labour will be the lead agency, but if the national service is revived then the Office of the Gyalpoi Zimpon will implement the component based on developed criteria.
Fund management
A designated account shall be opened at the RMA styled as ESP account. The fund released by GoI shall be directly deposited into the designated account. The report says that as a result of the present liquidity situation, it is imperative for the RMA to sterilize the Nu 4 bn at the beginning to avoid a liquidity burst in the system. Gradually, based on actual requirements and activities, the required fund shall be released through the budget fund account of the MoF into banks and immediately to citizens concerned.
The Nu 4 bn loan component of ESP fund with the principal is expected to generate Nu 5.432 bn after 10 years. Part of the interest, following an order of priority, will help meet the cost of running the BOIC, any fees and service charges in implementing the revolving funds, and also fund special support schemes and any balance amount can be ploughed back into the ESP fund as deemed necessary.
The principal amount that flows back, following the order of priority, will be in general be assessed to establish a small and medium enterprise (SME) bank or form a trust fund for businesses to support economic activities in the country, principal fund flow back from the revolving fund will be reviewed for plough back based on the demand and fund situation. Principal fund flow back from subordinate debt will be used specifically for ESP fund and additional funding for special support schemes will not exceed a maximum of 20 percent.
The principal amount of the fund flow back will also be used to finance special infrastructure projects and other projects approved by the government.
Impact of ESP
The report says that the ESP fund will result in a Nu 5 bn rupee reserve, Nu 400 mn savings in interest payment on rupee borrowings, create 7,525 jobs, create 5,605 new business projects lead to gross interest earning of Nu 1.852 bn and a total of Nu 5.432 bn generated from the ESP.
The government has, till date, received only Nu 2.5 bn in its ESP fund while it is aiming to spend Nu 4.2 bn in the first year of the ESP.
