State owned enterprises

The Interim Government

Last year, during the election period, the Interim Government seems to have conducted a study of state owned enterprises and released a report that is critical of companies established by the former government. That’s okay. It’s good that the Interim Government was concerned whether “established protocol” was followed while establishing the new companies and recommended strategies to streamline the system.

What’s not okay is the timing. The Interim Government seems to have taken up the issue of SOEs immediately after the primary elections … that is after PDP lost. So I’m still wondering if SOEs would have received the Interim Government’s attention if PDP had made it through the primary round of elections.

If the Interim Government was honest and if they genuinely wanted to question the usefulness and viability of SOEs, they should have done so immediately after assuming office, without hesitating to consider if the former government would return or not. In fact, if SOEs was a burning priority, one that merited the attention of the interim government, the members, some of them at least, should have questioned the government even before their appointment as members of the 3-month long interim government.

The RMA Governor, in particular, should have voiced his concerns to the former government either directly or included them in the RMA’s annual policy briefings. He didn’t. Similarly, the DHI should have questioned the establishment of the Construction Development Corporation or the State Mining Corporation as a part of their organization. They didn’t; instead they readily accepted both the corporations.

But like I said, it’s good that the interim government conducted the review. And in spite of the fact that due process was followed while establishing each and every one of the new SOEs, I agree that better guidelines may need to be in place.

On the other hand, I object to Kuensel’s reference to SOEs as a “political tool” that “cannot be created to accommodate some party supporters in the name of growth”. In this connection, I challenge Kuensel to substantiate their views that some SOEs were established for political reason, and prove their allegation that they were created to benefit party supporters. These are serious accusations and must be dealt with forthright.

Here are some of the SOEs that we established in the previous five years:

  • Bhutan Lottery to revive the lucrative lottery business that was terminated in 2011. The corporation is already turning in a profit of about Nu 50 million annually. And that’s without yet entering the huge market in India.
  • Duty Free Shop to improve operations. DFS barely earned Nu 16 million when it was run by the Ministry of Finance. Last year, less than 2 years after its establishment as an SOE, it earned Nu 50 million.
  • Royal Bhutan Helicopter Services earned Nu 163 million in 2017 and is already declaring healthy dividends to the government.
  • Rural Enterprise Development Corporation was established as a corporation after the opposition party’s (and Kuensel’s) loud objections to the erstwhile BOIC. By 2017, REDC had already disbursed Nu 524 million to establish 360 small businesses in rural Bhutan.
  • Construction Development Corporation was transferred to DGPC to take up hydropower construction. They are already building tunnels in addition to some of the best bridges in the country. (Incidentally, I was responsible for encouraging DGPC to expand Bhutan Hydropower Services and establish Bhutan Automation.)
  • State Mining Corporation to harvest strategic mineral resources sustainably.
  • Farm Shops as a part of FCB to provide fair price goods and to buy agricultural produce in rural villages.
  • Farm Machinery Corporation to mechanize farms and to revert fallow land for cultivation.
  • Green Bhutan to help in conservation efforts, especially through afforestation and reforestation.
  • Livestock Development Corporation to produce animal husbandry inputs for farmers.

Granted, some of these corporations are yet to turn a profit. These include SMC, FMCL, Green Bhutan and LDC. But give them time and they all will become financially viable. At any rate, profit was not the main motive for establishing these corporations. That these services were not available, especially at desired quality and scale, motivated the government to establish these corporations. More importantly, they were established to create much-needed jobs for our youth, jobs that would be seen as “government jobs”.

I wish to make one final point. The government seems to be thinking of privatizing some of the SOEs. I don’t know which ones they may have in mind, but I hope they will be careful. I hope they will tread cautiously. I hope they will not misuse privatization as a ruse to transfer ownership of national assets (like the juicy lottery business) to a few already well-off individuals. And I hope they will not misuse privatization as a quick way of generating revenue to pay for expensive campaign promises. That would be unsustainable. That would be short-sighted.

Fueling growth

Everyone is talking about the Pay Commission’s report. And I too will gradually join the conversation. To start, I wish to discuss the Commission’s recommendation to increase fuel taxes.

Everyone would remember 2013.

The country was experiencing an economic crisis. In its efforts to address the critical shortage of Indian rupees, the central bank imposed a series of policies including restricting the supply of rupees; rationing rupees to Bhutanese traveling to India for business, studies, medical treatment or pilgrimage; closing bank accounts of Indian citizens; and suspending loans in several sectors. These policies did little to solve the rupee crisis. Instead, they fueled panic, prompting citizens to hoard Indian currency. The government also added to the panic by curtailing construction, banning the import of vehicles and furniture, and selling hundreds of millions of dollars from the country’s reserves.

The result was that Bhutanese were buying rupees at a premium, paying Nu 110 for every Rs 100 when in fact the two currencies were pegged at equal value. More importantly, the entire economy took a big hit, growing at just 2.14% in 2013, the lowest GDP growth in decades.

So, soon after assuming office in 2013, I worked closely with RMA and successfully addressed the rupee crisis. In addition, we gradually improved the economy by injecting liquidity in the banking system, investing in infrastructure (notably in widening the East-West Highway, building central schools, improving airports, blacktopping gewog roads, constructing farm roads, and expanding the electricity and telecom network), reducing interest rates, improving ease of doing business, waiving taxes for small businesses, establishing REDC, and providing unprecedented support to hydropower, tourism, agriculture, livestock and CSIs.

Our hard work paid off. GDP growth rates increased from a low of 2.15% in 2013 to 5.4% in 2014, 6.6% in 2015 and 8% in 2016. Additionally, GDP was forecast to grow by 8.4% in 2017 and 9.2% in 2018.

Table by The Bhutanese

And to ensure that the economy continued to grow, fuel prices were reduced drastically in November of 2017. The idea was that lower fuel prices would drive down the cost of construction, traded goods and some other services. The idea was also to allow truck drivers and taxi drivers, most of whom own the vehicles they drive, to earn more money. And finally, the idea was to make travel cheaper in rural Bhutan where farmers are required to drive much longer distances to get to neighboring villages, gewog centers and dzongkhag headquarters.

That’s why I was alarmed to read the Pay Commission’s recommendation to increase taxes on fuel. Specifically, they recommended that “In order to promote the Polluter Pays Principle, it is timely to revise the green tax on fuel. For example, if the green tax is revised by 5%, there is opportunity to generate additional revenue of Nu.450 million per annum.”

If increased consumption of fuel is leading to increased pollution, I would support an increased “green tax”. But I would do so on condition that revenue from green tax should be used for climate change mitigation and adaptation measures, not to finance increases in salaries.

Otherwise, the so-called green tax must not be misused. In fact, the price of fuel should not be increased so soon after they were deliberately reduced. Doing so would affect the incomes of truck drivers, taxi drivers and farmers. But, and more importantly, raising taxes on fuel would risk undoing all the hard-earned gains we have made in the economy since 2013.

In this context, the government should remember 2013.

Code language

What we, as a country, need to do to rescue the Thimphu Tech Park. Yes, it will take a full generation to get there. But that’s why we must start immediately, with a sense of urgency.

Expensive talk

The Ministry of Agriculture says that the prices of local vegetables is increasing. They are right. In fact, the prices of local vegetables have not just increased; they have skyrocketed.

Between this time last year and now, according to the Ministry of Agriculture, the price for local cabbages increased from Nu 37.43 to Nu 48.75. That’s an increase of 30.25%. The price of local chillies increased from Nu 270 to Nu 300 or by 11.11%. And the prices of potatoes and beans have jumped by a massive 47.22% and  39.40% respectively.

So what’s driving the prices of local vegetables?  The Ministry of Agriculture has blamed inflation, the seasons and the rupee crisis.

Yes, inflation would have caused price increases. The last quarter recorded inflation at 13.53%. That’s the highest rate we’ve seen in years. But that’s nowhere near the 47% increase in the price of local potatoes. By comparison, the price of imported potatoes, which was Nu 17.83 per kg last year, increased only slightly, to Nu 20 per kg this year. We import most of what we consume from India. So inflation rates here follow those in India. And since the price of imported potatoes (and other vegetables) went up only marginally, inflation cannot be blamed for the huge increase in the cost of local potatoes (and local vegetables).

Nor can we blame the seasons. In their report, the government compared vegetables prices between two years but at the same season. So when they say that the price of local cabbages have increased from Nu 37.43 to Nu 48.75 per kg, they are talking about  prices in June last year, versus prices in June this year. More significantly, the government has found out that production of local vegetables have gone up. All this means that we can’t pin the blame on the season.

The third excuse that the Ministry of Agriculture has offered for increasing vegetable prices is the rupee crisis. I agree, the rupee crisis is to blame. But not for the reasons that the Ministry of Agriculture thinks; not because the ngultrum is fetching fewer Indian rupees at the informal exchange market.

The rupee crisis did indeed cause a sudden hike in vegetable prices. But they went up due to an unlikely event. On 12 April the prime minister went on national TV to talk about the rupee crisis. During that talk, the prime minister announced that the government would no longer permit vegetables to be imported from India. Prices of local vegetables went up immediately. And haven’t come down since.

Shopping for poi

Come try this

Walk into a shopping mall, and you’ll be greeted by customers sampling various perfumes.

Walk into the Norling Building in Changangkha, and you’ll also be greeted by customers sampling various perfumes. But there’s one big difference. The customers in the Norling Building, in Nado Poi shop to be exact, would be trying out different types of poi – traditional incense sticks for religious offerings.

That, at least, is what I saw the other day. I went to Nado’s to buy some poi, and bumped into a group of Taiwanese tourists. They, like children in a sweetshop, were excitedly trying out various types of incense – lighting the sticks, comparing fragrances, and identifying the best offerings to take back home.

Nado, an ex-monk from Tharpaling Monastery, started the incense factory more than two decades ago. The factory, Nado Poizokhang, has come a long way. They manufacture at least 13 types of poi, ranging in price from Nu 30 per packet to Nu 370 for a packet of their top-of-the-line Zurpoe.

Producing poi needs at least 30 different ingredients and one whole month of hard work involving no less than 12 full time employees. Most of the poi is consumed within the country. But a good amount ends up in homes and monasteries abroad.

The next time you are in the Changangkha area, I recommend that you try out the wonderful fragrances at Nado Poi Shop – you’ll add a whole new dimension to your shopping experience.

Taxing issues

The National Assembly passed the Tax Revision Bill last week. The Bill is now with the National Council. The Council will discuss the Bill, but, because it is a “money bill”, the Council can only make suggestions and recommendations that the National Assembly may, or may not, chose to accept.

(Last year, the Assembly did not accept any of the Council’s recommendations on the budget and tax revision bills. In fact, the Assembly just skimmed through the recommendations, barely discussing them.)

The National Assembly has passed the Tax Revision Bill. But, we didn’t discuss it properly. After the Bill was introduced, the members made general comments. But the specifics of the Bill, including the individual taxes were not discussed, and just one item – Green Taxes on vehicles – was put to the vote.

I’m happy that the National Assembly didn’t approve most of the taxation measures. In fact, in my humble opinion, even the reduced green tax should not have been approved, given that the government failed to make a strong enough argument justifying the tax.

Still, we should have discussed the bill properly. The government should have justified each and every tax raise that they had proposed. And the Assembly should have debated the proposals thoroughly before deciding to approve or reject them.

Here are some of the issues I’d hoped to raise:

Justification to raise taxes. The Tax Revision Bill proposed introducing a Green Tax (for vehicles, fuels, lubricants, kerosene, LPG, refrigerators, freezers and air conditioners); raising the Excise Duty (on alcohol, domestic and imported); and raising the Sales Tax (on meat, fish and eggs, silk fabrics, furniture, and power chainsaws).

The government informed the Assembly that the proposed taxes would help address the ongoing rupee shortage. But we didn’t get to discuss how, and by how much, the taxes would reduce imports from India, or enhance overall exports.

I’m all for raising taxes. But only if the government can justify, with numbers, why the taxes need to be raised and how the increased revenue will be spent. The government would also have to prove that the increased taxes would not overburden the people, directly or indirectly, and that they would not make doing business any more difficult.

In this case – if taxes are being raised to address the rupee shortage – I also wanted to know that the government would not spend the extra revenue generated. Spending that money would just add to the rupee problem, not solve it, as almost all of the government’s expenditure ultimately goes to finance imports of goods and services, mostly from India.

Green tax. All taxes must have a legal basis. The Income Tax Act authorizes the imposition of PIT, BIT and CIT. The Sales Tax, Customs and Excise Act authorizes sales tax, customs duty and excise. The Land Act legitimizes land tax. The Local Government Act authorizes the collection of land tax, building, cattle, grazing, entertainment, advertisement and other taxes. And so on…

The so-called “green tax” is a new tax. As such, the Parliament should have first discussed the need for this tax, and then amended the relevant laws to permit the government to impose this new tax. Then, and only then, either as part of an amended law or as part of the Tax Revision Bill, should the government have proposed to levy the tax.

But I had several other questions on the Green Tax. One, why levy a green tax if the real objective is to reduce the rupee deficit? The purpose of a green tax should be to protect the environment, not to reduce the rupee deficit, and the proceeds from tax should go to programs that solve environmental problems.

But, two, do we have major environmental problems, and, more importantly, would the proposed green tax result in positive and meaningful contributions to the environment?

Three, wouldn’t taxing kerosene increase the cost of living for our poor? They are the ones who are the most dependent on kerosene for cooking and lighting. And wouldn’t taxing fuel increase the cost of transport, and therefore, the cost of goods? Would the general population be able to afford the resulting increase in the price of goods and services?

And four, do we really want to tax refrigerators and air conditioners? Would the taxes result in a decrease in the number of refrigerators, and if so, would that make a meaningful contribution to the environment? On the other hand, shouldn’t we be encouraging our people to enjoy the immediate health benefits and the conveniences of refrigerators?

Excise on alcohol. Alcohol is a real and growing menace in Bhutan. We need to act now, before we lose more people, especially our youth, to this scourge. But taxes alone will not prevent our people from drinking excessively. We need a holistic strategy, which includes taxes, but only as a part of bigger, more comprehensive action plan.

If the government must tax alcohol, tax those products that are the most dangerous. Last year’s tax increase avoided them; ditto this year.

Meat, fish and eggs. Taxing these items will, supposedly, lead to lower consumption, which, in turn, will lead to lower imports. Good. But what about domestic production? Wouldn’t the increased taxes also hinder domestic production of meat, fish and eggs?

Furniture. Tax imported furniture. But please, please, don’t make domestic production any more difficult than it already is.

Silk fabric. I have no idea how imposing a 10% sales tax and 50% customs duty on silk fabric will improve the rupee situation. But if it does, I’m for it. Otherwise, we need to rethink our strategy.

Power chainsaw. What’s the big idea of slapping a 20% sales tax and 30% customs on power chainsaws? If it is the environment, strengthen and enforce existing regulations. But, please, let’s not arbitrarily increase the price of labour saving devices.

The rupee crisis. The government must apply fiscal policy to address on-going and growing rupee shortage. One way is to increase taxes. But I’m not convinced that the proposed taxes would have had a meaningful effect, especially if the government were to spend the increased revenue from the increased taxes.

A better and more effective way to control the rupee crisis would be to reign in government expenditure. But that’s not what’s been happening. The government’s current expenditure for 2010-11 was Nu 17, 735 million. It jumped to Nu 17, 185 million in 2011-12. And just last week, the Assembly approved a current budget of Nu 18,262 million for 2012-13.

Responsible government?

“As the Honourable Members are aware, our balance of payments with India has been worsening and the RMA has been facing a severe scarcity of Indian Rupees…” That was the finance minister’s opening line when he introduced the Tax Revision Bill in the National Assembly earlier today.

Yes, our balance of payments with India is in bad shape. And we are facing a severe shortage of Indian currency. In other words, we face a rupee crisis.

We have a crisis in our hands. And it’s no point playing the blame game. We must work together – we must think and act as one – to overcome the current crisis. And we must seize every economic opportunity, old and new, so that we emerge stronger from these difficult times.

Still, we must know who got us into this mess. And we must hold that person to account. That’s if we are serious about good governance. That’s if we are serious about getting out of this mess. Otherwise, with the same person in charge, the situation will just get worse.

So yesterday, during the National Assembly’s Question Hour, I asked the finance minister to tell us who should take responsibility for the rupee crisis. My question was straightforward:

The rupee crisis has caused a great deal of hardship to the people of Bhutan. More importantly, the crisis could compromise the economic sovereignty and security of our country. Will the Hon’ble Minister please explain who will take responsibility for the rupee crisis?

My question was straightforward. But the reply, which offered a detailed account of the causes and solutions of the rupee problem, was long and cumbersome. And the reply did not point out who, specifically, should be held accountable. Instead, the finance minister indicated that the Bhutanese people were both responsible and accountable for the current situation.

So let’s take a poll. Let’s see who we think should assume responsibility for the rupee crisis. Should it be the prime minister? Or should it be the finance minister? Or the RMA governor? Or should it be the people at large who should take responsibility for the economic mess?

Business on pedestrian day

The central secretariat complex outside the Tashichhodzong wore a deserted look on pedestrian day, this afternoon. No doubt, our civil servants were busy in their own offices, working, since they wouldn’t be able to attend the otherwise unending number of meetings that plague our government.

Norzin Lam, Thimphu’s main street, also wore a deserted look this afternoon. I saw students walking home and taxis zipping around, but I saw little else. Shops were empty. And some, like these shops on upper Norzin Lam, were closed for business.

There are many things wrong with pedestrian day. And one of the most damaging is its effect on businesses. Restaurants, grocery shops, hardware stores, commercial offices, even the small pann shops, are reeling under the effects of Pedestrian day. That’s why, during question hour this morning, I’d wanted to ask the minister for economic affairs this question:

Will the Hon’ble Minister please report on the amount of business that has been lost in Thimphu because of the implementation of “Pedestrian Day”? Furthermore, will the Hon’ble Minister kindly explain the Royal Government’s measures to facilitate business on “Pedestrian Day”?

However, my question was not included for discussion in today’s question hour. Perhaps the minister for economic affairs was of the opinion that my question was not relevant. And, perhaps, he convinced the Hon’ble Speaker to reject my question. But the question remains: is pedestrian day affecting businesses?

The government cannot continue to ignore this question. The question is relevant. And it is important. But it’s not just Thimphu businesses which are suffering – businesses in other dzongkhags, especially those in the South, are also reeling from the impact of pedestrian day.

Real losers

Remove the rot

Does anyone know why the government insists on permitting only FCB to import vegetables? I don’t. The prime minister had explained that only FCB would be provided Indian rupees to import vegetables as FCB would be able to buy in bulk and would not be motivated by profit, which would make prices come down.

But vegetable prices have not come down. Instead, they’ve skyrocketed, because FCB’s prices turned out to be much higher. Plus, a lot of their vegetables had turned bad even before they reached Thimphu. As a result, consumers paid higher prices, but received poorer quality, and vegetable suppliers suffered big losses. In addition, the government now has to bear the cost of 65MT of vegetables that were rejected by the vegetable suppliers.

FCB’s first attempt at importing vegetables has failed terribly. So you’d think that the government w0uld learn from the experience and finally accept that importing vegetables from Falakata is not as easy as it seems. You’d think that they would revert to letting the vegetable suppliers do what they do best, i.e., import vegetables, a specialized trade that they’ve mastered over decades of doing the business.

But what does the government do? They dig in their heels and redouble their efforts to force FCB to import vegetables in spite of the fact that they obviously do not know how. So FCB has reportedly hired an Indian vegetable supplier to “help” them. And the government has forced our vegetable suppliers to pay as much as 70% of their orders upfront, in advance. The idea, it seems, is to coerce vegetable suppliers to buy from FCB, regardless of the quality and the price of the vegetables.

Doing business in Bhutan is difficult as it is. But the government seems hell-bent on making it even more difficult. They should know that businesses, even if they are small time vegetable suppliers, do not stand to lose much; they’ll simply move on. The  real losers, the government should know, are the consumers, the people of Bhutan.

 

 

Too good

Yesterday’s economic forum was scripted and implemented to perfection.

  • The forum, which was organised by GNHC and supported by the UNDP, was called “Macroeconomic Challenges, Opportunities and Policy Options for Bhutna” and held at the National Convention Centre.
  • The forum was attended by the prime minister, cabinet ministers, senior civil servants and
  • The forum was NOT attended by the governor of the Royal Monetary Authority and his two deputies. The CEOs of the financial institutions could not attend as they were summoned, by the RMA governor, for a separate meeting.
  • The experts at the forum included Professor Joeseph Stiglitz of Columbia University, and Dr Rob Vos and Dr Hamidur Rashid from UN’s department of economic and social affairs.
  • The experts concluded that our banks had lent too much money too easily, that private consumption was too high, that are foreign currency reserves were very high, that we should use our foreign currency reserves, and that the rupee crunch was caused by our inability to properly manage our foreign currency reserves.
  • Professor Stiglitz, a Nobel laureate and leading economist, certified that the rupee crunch is not a crisis.
  • Lyonpo Yeshey Zimba reiterated the findings of the expert group, and counted the economic successes of the government.
  • And the media – print, TV and radio – informed our people that experts, led by a Professor Stiglitz, had found that our economic situation was not in trouble, and that the rupee crunch could easily be dealt with by proper management of our foreign currency reserves.

If all this sound too good to be true, it probably is.

Consider this: Just 6 months ago, in December last year, the RMA’s rupee borrowings had peaked at Rs 11 billion, and the government had sold US$ 200 million for Rs 10.3 billion to clear Rs 8 billion. So at that time we were left with Rs 3 billion in credit, and Rs 2.3 billion in cash.

Today, the RMA’s rupee borrowings have reportedly already hit Rs 15 billion. And we have already spent the Rs 2.3 billion we had in cash. So that means that in the last six months we have accumulated a rupee deficit of 14.3 billion (Rs 15 billion – Rs 3 billion + Rs 2.3 billion = Rs 14.3 billion).

We owe Rs 15 billion. And we have US$ 720 million in reserves. US$ 720 million equals more than Rs 41 billion at today’s exchange rates. That’s an excess of Rs 26 billion. And that’s why the international experts have us convinced that the rupee crunch is a foreign currency reserve management issue; not an economic crisis.

Now consider this: we accumulated a rupee deficit of 14.3 billion in less than 6 months. If we use our foreign currency reserves to clear this debt, we’ll be left with the equivalent of Rs 26 billion in foreign currency reserves. But at this rate, we will have run up a deficit in excess of Rs 26 billion in less than one year. And we can again use our foreign currency reserves to clear this deficit too.

But then we’ll be left with nothing in our foreign currency reserves. Forget about the Constitutional requirement of maintaining foreign currency reserves not less than one year’s essential imports – our foreign currency reserves will have dropped all the way to zero; it will have been completely depleted. In other words, if, as the experts suggest, we “manage” our foreign currency reserves, we will have spent our entire reserves in less than a year, and we’ll be forced to accept, belatedly, that we are dealing with a major economic crisis.

So don’t blame the mismanagement of our foreign currency reserves for the ongoing rupee crunch. And, please, don’t think of misusing our reserves.

Instead, look at where the real problem lies. Look, for example, at government expenditure. And ask our experts if an increase in government expenditure from 21 billion per year (in 2008-09) to 38 billion per year (budgeted for 2011-12) could have caused the rupee crunch; ask them if excessive and uncontrolled government expenditure is what could have caused the economic crisis.