Bhutan: Strengthening Economic Management Program II

Horizontal Tabs

Lessons

Legislative and political risks should be examined carefully.

Property tax proposals could not be introduced in Bhutan’s 19 thromdes (municipalities), except for Thimphu, because of a 2016 Supreme Court writ that declared the dzongkhag (administrative and judicial district) thromdes “unconstitutional.” The operationalization of property taxes based on property valuation methodology had been delayed even in Thimphu because of its political sensitivity. This demonstrates the need for policy actions involving legislative changes to be examined carefully for potential political risks and legal issues. Such risks can be particularly acute closer to elections or during a change in government. Contingencies pertaining to such risks should be built into projects during the design stage. For agencies concerned with revenue collection, reforms to improve operational efficiency or expand the tax base may be more acceptable than suggesting higher or additional taxes.

Project Cycle Stage:

Preparation

Implementation

Consolidate gains before introducing further reforms.

The pace of a program should match the borrower’s capacity and political willingness to change. Policy actions must be thoroughly assessed, clearly defined, relevant, and achievable within the required time frame. Unless the borrower has the intent and capacity for rapid change, gradual reforms may be preferable and more sustainable. The approach taken by this program in implementing the 24 policy actions was illustrative of this gradual, phased approach.

Project Cycle Stage:

Implementation

Strong government ownership and effective program coordination are essential.

The Strengthening Economic Management Program II (SEMP II) was a complex program that covered a wide range of issues. Eight implementing agencies were involved. It was delivered successfully because of strong government ownership and excellent program coordination, with an effective partnership between ADB and the government, including the Royal Monetary Authority.

Project Cycle Stage:

Implementation

Communication and consultation are important at every stage of a program.

At the design stage, communication and consultation ensure thorough assessment of timelines and risks. The implementing agencies should be able to appreciate the benefits that accrue to them from the program. Stakeholder consultations during implementation provide early-warning signals that can be addressed jointly in time.

Project Cycle Stage:

Preparation

Implementation

Utilize technical assistance (TA) resources effectively for capacity building.

SEMP II was strongly supported by an attached TA and three related ongoing ADB-supported TA grants. These TA projects built the capacity of the Ministry of Finance for debt and cash management as well as fostered the sustainability of the reforms supported by the program.

Project Cycle Stage:

Preparation

Implementation

Actions related to information technology (IT) require attention during both planning and implementation.

IT interventions have made significant contributions under the program. A lesson gained is that IT interventions should be designed and implemented carefully because course correction during implementation can cause delays and cost overruns. Implementation of the revenue administration management information system was hindered by issues that could have led to a major downside but were successfully addressed through tight monitoring and provision of additional resources, including a techno-functional consultant who was hired to intermediate with the Department of Revenue and Customs and the software developer.

Project Cycle Stage:

Preparation

Implementation

Background

Despite averaging a robust 8% annual growth in gross domestic product (GDP) during 2001–2011, Bhutan faced a major rupee liquidity crunch in 2012. A study requested by the Ministry of Finance from the Asian Development Bank (ADB) revealed the crunch to be rooted in several structural and cyclical economic imbalances, including (i) a narrow economic base, (ii) an overreliance on hydropower development that created mismatches in external inward and outward flows, (iii) rapid credit-driven growth in imports that led to the fast depletion of Indian rupee reserves, and (iv) policy distortions associated with weak macroeconomic management and financial intermediation.

ADB recommended reform measures to decelerate growth and engineer a soft landing while strengthening fiscal, monetary, and liquidity management and establishing the foundation for financial stability. These reforms formed the building blocks for the Strengthening Economic Management Program (SEMP) in 2013, which successfully assisted the government in stabilizing the economy. To deepen the reforms initiated under SEMP and ensure sustained improvement in macroeconomic and financial management, ADB approved SEMP II, a 2-tranche, $36.2 million policy-based grant and loan, in June 2015.

SEMP II focused on strengthening macroprudential management to shore up domestic revenues and removing the structural barriers to access to finance to support the development of a more broad-based economy. Its expected impact was a sustainable growth trajectory for Bhutan and intended outcome was improved macroeconomic stability. It had two planned outputs: (i) improved macroeconomic management, specifically stronger revenue and macroprudential management; and (ii) strengthened financial sector development by developing the capital market, promoting financial inclusion, and improving the performance of the Credit Information Bureau. These outputs were to be achieved through 24 policy actions: 8 under tranche 1 and 16 under tranche 2.

Completion of all the policy actions, except for the one on property tax reforms which was only partially complied with, enabled the program to achieve its planned outputs and support the government in the 3Rs of recovery, rebalancing, and reorientation. Recovery from the 2012 liquidity shock was enhanced through better implementation of direct and sales taxes, introduction of the objective property tax valuation methodology, establishment of a taxpayer information call center, and upgrading of the revenue management center of Thimphu Thromde (municipality).

Because of these reforms, the number of registered taxpayers increased by 13.7% in 2016 from 94,690 in 2014. The online tax filers swelled by 74% during the same period. Property tax collection in Thimphu jumped by almost 70% in 2016 from its 2015-level.

Policy actions to strengthen financial stability through stress testing, the adoption of a liquidity management framework, and the publication of an annual Treasury Bill issuance calendar, among others, rebalanced the economy. Concerted efforts to develop capital markets and improve financial literacy and inclusion, a holistic and innovative approach to financial inclusion, reoriented the economy toward greater private sector participation over the long-run.

Taking a gradual approach, starting with capacity building and consolidation of gains before moving on to further reforms, the program thus succeeded in introducing permanent structural and/or corrective measures that strengthened Bhutan’s economy and supported the development of a sustainable and balanced growth model in the country. The Ministry of Finance’s Department of Public Accounts and later the Department of Macroeconomic Affairs were the project executing agencies.

Project Information

Project Name:

Strengthening Economic Management Program II

Report Date:

July, 2018

Main Sector:

Finance

Public Sector Management

Country:

Bhutan

Project Number:

46371-002