KEY ISSUES Outlook and Risks: Growth in Bhutan was robust during the last Five-Year Plan (2008/09 to 2012/13), driven by the development of the hydropower sector. However, growth has slowed recently due to policy efforts to moderate aggregate demand to ameliorate overheating pressures. Downside risks remain due to high public debt, potential financial sector vulnerabilities, and the need to manage recurrent pressures on Indian rupee reserves. The main external vulnerability stems from a prolongation of the slowdown in India, Bhutan’s main trade and development partner. Main Policy Recommendations: The main near-term policy challenge is to revive growth while ensuring that external pressures do not reemerge. The key policy recommendations are: • Fiscal policy should be tightened while preserving social and productive expenditure. Revenue reforms, including broadening the tax base by reducing the number of zero- sales tax-rated goods and taxing domestic value added more extensively, would help in the near term. Over the medium term, consideration should be given to introducing a value-added tax. • On monetary policy, external flows should be fully sterilized and liquidity should be tightened to prevent credit growth from rebounding too strongly. Interest rate spreads need to be narrowed and better reflect market conditions. Over the medium-term, there is a need to further improve the monetary transmission mechanism and deepen the financial system. In particular, it is essential to further develop the government bond market by greater and more regular issuance. • Reserves have to be managed carefully to contain recurrent pressures on rupee reserves, including by aligning the currency composition of reserves with that of the structure of external liabilities and trade. • Further financial deepening should be balanced with maintaining financial stability. Risks to stability necessitate continued vigilance, given past rapid private credit growth. Supervision and regulation need to be strengthened to monitor and safeguard banks’ asset quality and limit systemic risk, including by use of macroprudential measures.
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|Size: ||7.1 MB|
|Publisher: ||INTERNATIONAL MONETARY FUND|
|Date published: || 2014|
|ISBN: ||9781498324533 (DRM-EPUB)|
|Copying:||of 20 selections every 20 days allowed|
|Printing:||of 20 pages every 20 days allowed|
|Read Aloud: ||not allowed|