Stabilization fund to be set up from Hydro revenue

The Ministry of Finance and the Royal Monetary Authority have started working on setting up a Stabilization Fund where a percentage of hydropower revenue and free royalty energy will be saved.

The aim is to have the fund in place before the end of the current government’s term.

The fund among other things is aimed at avoiding financial problems like the rupee and credit crises in the future.

A government report drafted by a high level committee recommended the setting up of such a fund based in Bhutan’s own needs and also based on examples of the funds success in other countries.

The recommendation was made in light of past rupee shortage and credit crunch. Another major reason for the fund is that Bhutan will have surplus revenue in the long run once the major hydro projects are constructed and that revenue can go into this fund. The report projects that towards the end of the 11th plan itself three projects would be coming on line giving a surplus of a few billions.

The report mentions several grounds or reasons as why Bhutan should have a stabilization fund. The committee also closely studied international practices and experiences in having such a fund.

One objective of the stabilization fund is to stabilize and synchronize inflow and outflow mismatches.

The fund could be used to absorb the excess liquidity and rupee surplus when the revenue comes in and then be used to ensure that there is no shortage when it is time for an outflow. It can, therefore, balance credit creation and also insure there is no rupee shortage.

Another objective is to insure inter-generational equity whereby all the resources available are not just finished in this generation but also left for future generations. The idea here is create long term savings vehicle and invest in foreign markets and also domestically.

The fund is also aimed at stabilizing the government’s stream of fiscal revenue. The study found that in the wake of the global financial crisis, a lot of the countries that had a stabilization fund or sovereign wealth fund could access such savings to give fiscal stimulus packages to keep the GDP growth rate afloat. In Bhutan’s case the fund would enable the government to give stimulus packages to encourage the economy.

One objective of the fund is to also avoid the ‘Dutch Diseases’ that affects countries who are excessively dependant on natural resources. The Dutch Diseases is named after Netherlands but affected multiple countries like Russia, Indonesia, Philippines, Nigeria, Canada, etc when they experienced in boom in natural resource production or prices. This meant that there was a lot of foreign cash inflow leading to the strengthening of their currencies which in turn led to their manufacturing sector becoming less competitive as their exports became more expensive.

In order to avoid the Dutch Diseases the stabilization fund will streamline some of the inflows and invest them in economic diversification programs and in promoting private sector development.

The report has also studied stabilization funds in Chile and Botswana who like Bhutan are mainly dependant on natural resources for a bulk of their income and are developing countries. These countries were chosen due to their similarities with Bhutan and also their good performance.

What Bhutan learnt from Chile is that Bhutan does not need to have surplus to set up a stabilization fund. Even before the surplus Chile went ahead and set up the legal and institutional framework, human resource requirements and got the Act passed in parliament.

It is also strategic since there were no funds there was no political opposition to the law.Once the surplus revenue flows in everybody has to abide by it.

For Bhutan the idea is go ahead and explore the institutional and legal framework for such a fund and it would be ready by the time the surplus from 10,000 MW projects start coming in.

In most countries the stabilization fund is managed by the Central Bank who in turn oversees a group of fund managers. The Central bank in turn is accountable to the Ministry of Finance through the legal rules.

In Bhutan’s case the proposal is to keep a similar arrangement, with the management of Stabilization fund staying with the Central Bank as an autonomous body who in turn will be accountable to the Ministry of Finance for inflows and outflow through rules and procedures.

The stabilization fund is also expected to create a new level of fiscal discipline for Bhutan.

The GNHC has already received positive feedback from the Asian Development Bank on the initiative.

The full legal and institutional structure is expected to be ready within the 11th plan and it is expected to kick off with the surplus billions that are expected to flow in the last years of the 11th plan as some projects come online.

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