Introduction
During
the 4th Executive Forum[1]
held on December 2015 at RIGGS-Phuenstholing, the Chairperson of the RCSC
opened the floor to the executives asking them to share “one burning national
concern and what will they do to address it?”. Several executives took their
turn and touched upon institutional, philosophical and cultural issues.
However, one executive[2],
really fascinated everyone's attention when he said, “I and my fellow executives have witnessed Bhutan making tremendous
progress in social development (like health, education etc), but little have we
progressed in fiscal consolidation and macro-economic structural reforms.
Therefore, with impending decline in grant assistance for a foreign aid
dependent country like ours, it cannot be denied that our children will suffer
major economic imbalances in the near future”.
Bhutan
has achieved remarkable socio-economic progress over the past few decades, and
hence our country is soon expected to elevate its status from being the least
developed country (LDC) to a middle income country. Moreover, our country has
currently achieved all the millennium development goals, indicating enhanced
national capacity to deliver humanitarian services. Notwithstanding this
progress, Bhutan is facing new challenges which need to be looked at
holistically using the lens of a macro-economic sector. To cite a few,
currently, there is a narrow economic base which is manifested through growing
trade imbalances and may get worse in view of the impending decline in grant
assistance. This is mainly due to poor private sector development, which in
turn is partially to be blamed for rising unemployment particularly amongst the
youth. Such an awry situation is worsened by sizable import of skilled and
unskilled labor from the neighboring countries and lack of rural employment
opportunities. As a result, one can witness widening disparities in income
levels and increasing rural–urban migration. Moreover, our financial
institutions are underdeveloped, which is understandable because of the weak
economic base and simplistic financial networks. In order to ameliorate the
impending awkward situation from a macro-economic perspective, , I strongly
feel that the following key challenges in the areas of monetary, hydropower,
taxation and pension need to be addressed:
i)
Monetary challenges: The monetary policies in Bhutan cannot be effective to
influence the aggregate demand with the current exchange regime and infant
(immature) securities and short-term fund markets. As such, there is a strong
need to study the costs and benefits of a small and landlocked economy to
transit to a more liberal economy. Furthermore, there is a need to make
structural reforms to facilitate and encourage development of market for
securities and short-term fund.
ii) Hydropower challenges:
Although, hydropower contributes to one-fifth of the country’s GDP and
one-third of the Government's revenue, yet this sector is not free from major
economic challenges of financing and pricing and also from its impacts on other
sectors. In regard to financing, with Bhutan’s prospect of graduation from LDC,
it is inevitable that the government and investors have to shift from
concessional grants and loans to commercial financing with heavy covenants.
This will eventually lead to higher pricing of hydropower which may in turn
affect affordability of power in the domestic and international markets.
Furthermore, large investments in hydropower relative to economy present us
with a unique development opportunity to move to a higher income trajectory.
However, it creates adverse implications which are difficult to comprehend and
manage during the construction phase necessitating a study of the economic
absorptive capacity in conjunction with balancing realization of economic
self-reliance and environmental integrity & sustainability. In this regard,
there is a need to synthesize the complex challenge at macro-economic level to
assess and formulate an appropriate policy intervention for hydropower.
iii) Taxation challenges:
Given the impending decline in grant assistance as Bhutan’s income rises,
generating adequate domestic revenue is a key to financing its developmental
plans. However, the current tax system is characterized by a relatively narrow
tax base. For instance, the tax base was merely 40% in 2013-2014 which isone of
the lowest in the world. There is greater need for a multi-pronged effort to
increase sources of revenues and to improve the taxation policy. There is an
immediate need to focus on: (a) rationalizing the system of tax holidays and
pruning the list of tax exemptions and (b) reforming the system of indirect
taxation. In this context, the introduction of VAT and tax measures to attract
FDIs should be studied with its attendant advantages including increased
revenue collection.
iv) Pension challenges:
The separate proposal for pension is under progressed
