The Macro-financial Reform

One of the best advices to me came from a traditional Chinese doctor in Beijing. She spoke beautiful fluent English (traditional doctor and fluent English are rare but impressive combination I thought). I had gone with a pre-conceived notion that all traditional treatments are good for chronic diseases and have low side-effects. In my case it was not even chronic. After  “dungso” (Bhutanese traditional doctor), Korean ginseng , fish-oil capsules and western medications failed to produce satisfactory result, I had the opportunity to try traditional Chinese medication to lower my cholesterol level : the higher it got, lower became my body energy level.

Of the one hour consultation only 10 minutes were allocated on check-up, the rest were more of question (hers) and answer (mine) session including why I had so much trust on traditional Chinese medication, why I thought traditional medicines had low side-effects and so on.  At the end she prescribed food and exercise regimes and told me to come after a month for next consultation. No medication! In the next visit, cholesterol  level showed slight decline.  Good, she said and so I thought, thinking Chinese drugs would now be apt. This time she spoke and I listened.  It was all about “adjusting life style with time”.  Yes, “with time” including age, environment, situation and pace. People destroy their lives because at 60 they still live the life-style of 25, she said.  I understood but what about the cholesterol medicine. “Adjust your life-style  to properly suit you to live long”, and that was her medication for cholesterol. In other words, if I did not change my life-style with time ( “reform” in structural context) I will not live long.

The Asian Development Bank (ADB) recently approved a grant of $20.81 million and program loan of SDR 9.224 million (a total of $35.00 million equivalent) under the Strengthening Economic Management Program (the Program). The Program is aimed at pursuing policy reforms through budget support for the Government, “which currently faces weakening growth prospects and challenges in macroeconomic management.” The figures look generous. Generally, the generosity of ADB (for that matter all international financial institutions) is associated with seriousness. So “budget support”, “weakening growth prospects” and “challenges in macroeconomic management” are not to be taken lightly by any stretch of ingenuity.

And, the Program is pinned around “Over time, as construction (of hydropower projects) is completed and plants go onstream, exports increase, the trade balance gradually improves, and export earnings meet loan servicing requirements. In the meantime, sizable positive capital inflows from capital grants and development assistance keeps Bhutan’s balance of payments in surplus.” With no analytical support some may find the deduction cautious, I do not. In fact I am happy with it given the natural environment, technology, management and capacity factor of the existing hydropower plants. These may be the reasons why the Program outcome and performance targets and indicators are net of hydropower loans, meaning risks associated with hydropower loans are not taken into account in the Program formulation. If we add, it is heavy!

The ADB’s Program is generous with serious forewarnings:

 “If the critical factors are not properly addressed, the economy may be headed for a hard landing with potentially large economic losses reversing recent gains in socioeconomic development”

“In the absence of reform measures—with inflation, fiscal deficit, and current account deficit increasing and already at relatively high levels—the economy may run the risk of a hard landing and even recession.”

I read several places the words “hard landing”. Believe me, I know what goes into writing such sentences.  I am not implying anything but emphasizing at this critical juncture the importance of sound macroeconomic reform. The general attitude that program loan/grant  agreement covenants are to be implemented lightly aiming mostly at timely release of loans/grants, with low priority on in-depth  longer-term policy impacts because reforms are politically difficult to swallow, is misguided.  It would be a big mistake if we take lightly ADB’s timely offer to improve (i) budget and debt management system, (ii) revenue management system, (iii) macro-prudential management framework, and (iv) external and internal audit operations. If we just consider the Program as an instrument to meet the resource gap, we will miss the boat. I am quite definite about it.

I do not believe the macro-financial reforms under the Program are adequate to ensure macroeconomic stability and/or even ease rupee liquidity crunch near-term, but it is a good beginning in the right direction. I do see small weaknesses  on some aspects of the Program, e.g. the shallow mitigating measures for the risks identified and so on, but then it is up to the Government to go deeper. The fact is we live in a globalized world that moves fast, and  have to move with the flow with step-by-step integration of the economy with ICT sector. Those who do not follow the pace are bound to get dragged or even stepped on.  The choice right now is still with us: the wrong pick will take us to hard landing of economy. If you have doubt read carefully ADB’s Report and Recommendation of the President to the Board of Directors for Strengthening Economic Management Program, and Financing Agreement.

It would make much difference if the new Government is capable and credible to understand and undertake the reforms agreed with ADB with sincerity and diligence. To ADB the change of government  would not make a difference considering that the "Beneficiary" (changed from  "Borrower" for the Program) is the Kingdom of Bhutan, not Government of Bhutan.  The Financing Agreement is between the Kingdom of Bhutan and ADB.