NA approves establishing stabilization fund

The National Assembly had approved establishing a stabilisation fund to insulate the domestic economy from economic shocks. The government will pump in Nu 100 mn as seed money to start the fund.

The fund will maintain macroeconomic stability by sterilizing lumpy inflows from electricity exports and convertible currency related flows and mitigate imbalances in external sector, volatility in liquidity and support counter–cyclical measures in times of economic crisis for achieving desired level of economic growth.

A stabilization fund is a mechanism set up by a government or central bank to insulate the domestic economy from economic shocks. A primary motivation is maintaining a steady level of government revenue in the face of major commodity price fluctuations (hence the term “stabilization”), as well as the avoidance of inflation and associated atrophy of other domestic sectors (Dutch disease).

The finance minister reported that a committee comprising representatives from finance ministry, royal monetary authority, ministry of economic affairs, GNH Commission and DHI is still working on the formulation of the rules and regulations.

The parliament had asked the government to frame guidelines for the implementation of the fund and also present a report in this session.

Finance minister Lyonpo Namgay Dorji said the Royal Charter and guidelines would be submitted to the cabinet next month. “It is being set up for the first time and requires thorough study, it is taking time,” he said.

Citing provisions of the public finance Act, Panbang MP Dorji Wangdi said the government could establish such a fund. “But at the same time, the same clause of the Act cautions that such fund may be kept minimum,” he said.

He added that the government has already established endowment funds for crop, livestock, research and education. “Although such funds may prove useful in future, it may hamper cash flow, having too many of it in the short term,” he said.

Finance minister said that in the last fiscal year of the 10th Plan the estimated fiscal deficit was Nu 1.5 bn. However, the actual deficit was Nu 4 bn. He said the former government used more money to fulfill its undelivered pledges. “We have lots of pledges to achieve and we could have used this Nu 100 mn,” he said, “We have instead decided to use it as seed money for the stabilisation fund.”

The guidelines are not even drafted and most views raised by the members are based on the report the finance minister submitted argued Opposition leader, Pema Gyamtsho (PhD).

Foreign minister Damcho Dorji said the rudimentary function of stabilisation fund is to insulate the country from economic shocks. “The Constitution specifies the need for a similar fund, but the mechanism of implementation is not specified,” he said.

“As the country gets ready to graduate from the LDC group, external grants have already started to decline,” he said adding that the government had to rely on the Nu 5 bn grant from the government of India to stimulate the economy post the rupee crisis period.

Wamrong MP Karma Tenzin suggested that guidelines should have a clear system to address trade deficit. He said when there is excess liquidity in banks, financial institutions free credit. “This leads to more import causing rupee shortage,” he said. Such excess liquidity, he recommended, should be parked in the stabilisation fund. He added that the guideline should also look at how the stabilisation fund would ensure better debt management.

The house resolved to implement the fund based on the Royal Charter and guidelines that are being drafted.

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