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.

 

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Comments

  1. Your Excellency,

    I totally agree on your argument for green tax on fuel la.But I beg to differ on your reasoning for post 2013. We all must acknowledge that liquidity in our economy is directly proportionate to our rupee position and without our inherent strength to generate rupee or other forex , therefore any correction is just temporary.Further, we should also understand that extension of any credit translates directly into rupee outflow (some to the extent of 80%) and any favorable condition especially for consumption loans aggrevate the rupee situation .Post 2013 our rupee liquidity improved due to inflow of rupee and convertible currency through aid , grant and loan to finance our 11th FYP but not through increased economic activities that boosted our exports.Reserve position of RMA was in a comfortable zone and gradually all capital control got relaxed .Liquidity that was injected through ESP in the financial system to the tune of Rs.5 billion did boost credit creation and eased the availability of Rupee but was it channeled to productive sectors or did it help strengthen our competent sector for exports, only time will. Today, I am told that we are back to 2010 stage , surge in credit ,transport loan has become cheaper (MLR factor) and has encouraged import of more cars, a rough calculation show that every day there are 7 new consumer cars hitting the road for last 4 years. Soon RMA will drain out all the rupee reserves, will sought to line of credit from GOI , will use the SWAP facility and resort to commercial borrowing from Indian banks if we do not receive funds from India and I am certain that it is going to take some time because the next Indian PM has to visit Bhutan and make his goodwill gesture.I hope by then we don’t resort to wilder capital controls and morotorium on loans.I also do not appreciate we Bhutanese flaunting GDP growth rates when we have denounced it at the international level. Please do not get offended for being blunt la.

    Respectfully yours

  2. Karma Tshering says

    I would like to agree and support Your Excellency on the use of green tax for climate change mitigation and adaptation. but I would go further on the use of such green taxes for others as well.

    I will not comment on the DGP but want to provide my view on green tax on fuel as well. For a poor country, introduction of any form of taxes is a burden especially to our poor population. However, if it is done for greater benefits with minimum burden to our poor, it would do justice of taxes collected.

    Green tax on vehicle, fuel, etc…really need good consultations and strategy developed on how and where to spend.

    From my point of view, any green taxes introduced and collected should be used for those sectors and to encourage and incentivize the brown sectors, private, individuals to go green, energy efficient technologies, environment friendly technologies, etc. While we have fiscal incentives it is not very clear and encouraging enough for private sectors to invest in more energy efficient and environment friendly technologies and industries.

    As such tax tax collected from vehicles and proposed green tax from fuel should be discussed and agreed to be spent for the above areas. This will boost the economy and also encourage people to support the initiatives of the government.

    Using the amount for building the capacity of private sectors, agencies, individuals, facilitating networks with advanced countries and other measures will be of huge benefit.

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