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Why is Bhutan not insulated?

11 December 2009

The recent global crisis may not have had huge impact on Bhutanese economy, but economists say the country was not absolutely insulated from the shock. The economy growth slowed down and affected tourism and employment.

According to the Managing Director of Royal Monetary Authority (RMA), Bhutan did not experience adverse impact like other emerging economies of the world mainly because the Bhutanese economy was not fully integrated to the global economy.

Pushpalal Chhetri, the chief of Research and Statistics Division at RMA, said the real GDP growth declined very sharply from 19 percent in 2007 to 5 percent in 2008 owing to slackness in the external sector performance in the economy.

In the import-dependent economy of Bhutan, the increase in domestic credit directly translates into increased demand for imports posing threats to country’s international reserve.

Data show the performance of the tourism sector in 2008 remained staggered during the year despite consistent growth in the past. Monthly tourist arrival data show an adverse impact felt by the sector despite the country’s big events such as centenary and coronation celebrations and spectacular sight of solar eclipse.

Pushpalal Chhetri said that, in the export sector, the total production of major industries in Bhutan declined from Nu 1,561.2 million in second quarter of 2008 to Nu 1,316.9 million in third quarter of 2009. The export of major industries to third countries fell from Nu 32.7 million to Nu 13.6 million during the same period. The impact was largely felt by the minerals and wood-based industries.

According to UN’s Economic and Social Commission for Asia Pacific’s (ESCAP) latest projections released last week, Bhutan is expected to improve its growth performance from 5 percent in 2008 to 5.7 percent in 2009, and then to 6.6 percent in 2010. Dr Nagesh Kumar, Director of Macroeconomic Policy and Development Division, UN-ESCAP, said, “It may appear from the projections of growth rates that the worst is over and we can look forward to a robust recovery at least in the Asia-Pacific region. There is, however, need for caution in that respect.” He said these projections are subject to a number of risks and other policy challenges.

In particular, the policy environment is becoming more challenging requiring tough balancing act between strengthening of growth momentum while fighting the inflationary pressures, appreciating exchange rates and asset price bubbles that have begun to build up in the region with the return of volatile short-term capital flows.

Governments will have to plan exit strategies for expansionary policies in a very careful manner so as not to upset the growth momentum while maintaining stability, he said. According to Works and Human Settlement Minister Yeshey Zimba, Bhutan is on its path to recovery, and it should be backed by strong economic and fiscal policies. Bhutan is no longer isolated and she should face challenges of globalisation, he said.

Bhutan needs to integrate its economy to the global market, and doing so puts its economy at risk, according to economists. Integration makes Bhutan vulnerable to economic crisis. To have least effects of such global shocks, there are needs to have appropriate monetary and fiscal policies in the country.

To address these issues and many others, a national workshop in Bhutan is underway in Thimphu. The three-day national workshop on “Strengthening the response to the global financial crisis in Bhutan: the role of monetary, fiscal and external debt policy,” is aimed at sharing experiences and ideas on how the government can build its capacity in coping with the global financial and economic crisis, and improve resilience to future crises.

Bhutan didn’t have much adverse effect of the first shock as major portion of Bhutan’s export (hydropower) inflows were from India and similar developing economies where the impact of the crisis was not severe. However, in the sectors like tourism and manufacturing, the second shock of the crisis is yet to be felt and Bhutan must prepare for it. Experts from five different countries are attending the workshop. At the end of the workshop today, Bhutan is expected to integrate the knowledge gained in its fiscal and monetary policy.

By Rabi C Dahal

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Posted by Bhutan Observer · Filed Under Economy, News 

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