CASE

STUDY
STUDY ON TOOLS USED
BY MONETARY POLICY
AND FISCAL POLICY IN
BHUTAN

Abstract

Concisely exploration of momentary and fiscal policies in Bhutan. Tools used

by those two policies. The convincingness of the tools with proposals and
literature review.

Group Members Enrollment Number

Kabita Gimiray 108727
Kencho Wangmo
Sonam Peldon 107258
Tenzin Metok 107629
Purpose of the study:
To critically understand the monetary and fiscal policy and the tools used in fiscal and
monetary policy. Find out the contributions towards GDP and GNI and give suitable
recommendation on the tool used.

Objectives of the study

The study is done based on several objectives which are as follows:

To understand the monetary and fiscal policy of Bhutan.

To identify the tools used in Monetary and Fiscal policy.

To ascertain contribution towards GDP and GNI of the economy.

To analyse and give suitable recommendations on the tools used.

Introduction
For this case study we have chosen, deals with the loan deferment through raising of the non-
performing loan ratio as the monetary policy tool and with the reduction in taxation as a fiscal
policy tool.These two measures were enacted by various factors the reduction in taxation by the
government and loan deferment by the Royal Monetary Authority to deal Bhutan’s economic
slowdown during year 2020 caused by the covid-19 pandemic.In 2020 due to pandemic, the
best most positive estimate put Bhutan’s economy growth rate at merely 1%, the government
was worried that such diminish growth will cause long term economic problems. This is why
these two policies were enacted along with several others.

The monetary policy tool surveyed in this case study is deferment of loan by the Royal
Monetary Authority. The monetary policy is a policy measure that looks to increase or decrease
the flow of currency within the economy. Monetary is important because it allows central bank
to control inflation, deflation and investment within the economy. Whenever an economy is
slowing down and inflationary monetary policy increase the supply of currency in the economy
will boost investment but too much inflation can lead to the loss of purchasing power of the
money. Therefore some policies are designed to reduce the flow of currency in the economy
that is called a deflationary measure.

The fiscal policy surveyed in this case study is the reduction in Taxation by the government.
The fiscal policy is different from the monetary policy because it does not directly influence the

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flow of currency in the economy. The fiscal policy is how a government controls how much
activities there is in the economy. Unlike the monetary policy this fiscal policy is controlled
directly by the government. There are many kids of fiscal policy and one of them is
discretionary spending. It refers to a non-essential items such as recreation, entertainment and
luxury goods, when they have enough money left after paying all of their necessary expenses
such as their mortgage and utilities.

The objectives of National Accounts Report

The National Annual Reports aims to provide reliable and well-proven information of the
economy based upon its conditions and performance. This is achieved through constant
observation and measure of GDP, GNI, and FCE, GCF, Savings and net Exports. These
remarks and statistics are often beneficial to politicians, policy maker’s planners and overall
economic planning in the economy.

The National Accounts reports is published by the National Statistics Bureau and it looks to
highlight Bhutan’s economic performance in the past years. The 2020 report which is the latest
on file has Bhutan’s Gross Domestic Product at 178 billion ngultrums. The Gross National
Income is likely lower that is 162 billion ngultrums. The GDP measures the amount of new
economic activities in the country in the past year. The GNI measures income by Bhutanese
nationals within its borders and outside.Between 2018 to 2019Bhutan’s GDP grew at the ratio
of 5.46% and GNI at 5.38%. The fact that there are two indicators are similar says that Bhutan’s
GDP and GNI are growing at a same rate. What this means is Bhutan’s GDP is not completely
carried by the GNI. Which would means remittances like money send from Australia to Bhutan
makes that much of a difference.

Bhutan’s GDP per capita is two lakh forty thousand ngultrum per year. Which means that the
average Bhutanese performed economic activity worth two and half lakhs in 2019. GNI is two
lakhs twenty thousand ngultrums per year. The GDP inflator is 0.97% which indicates the
inflation is not that much of an issue. In fact in Bhutan between2018 to 2019 the consumer’s
price index CPI is only 2.73%. Which means that consumer’s products which are the product
people use at home the prices only rose by 2.73%. The government expenditure as a percentage
of GDP is measure how big a role a government plays in an economy. The bigger the
percentage share the more involve the government is in the local economy.

In section 2.1 of National Accounts Report the NSB report that the GDP is measure in both
current and constant prices. The base year for Bhutan’s GDP estimated is year 2000. They
reflect the monetary value of out goods and services produced over a period of 2019 in
economy act price prevailing in the year of reporting which means since this report mainly
including data for 2019. Kit measures the monetary values for all goods and services produced
in 2019 at prices of 2019, while a constant price GDP reflects the monetary value of all goods
and services produced in 2019 at year 2000 prices. This estimation methodology follows the

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United Nations system of national accounts. Bhutan measure the GDP using expenditure and
production approach. Production means they measure all the goods of value produced in the
economy. Whereas expenditure means it measures expenses such as government expenditure,
consumer expenditure and inventory.

Monetary Policy
In order to ensure price stability and maintain financial stability, the central Bank of Bhutan has
its primary aim to design and implement monetary policy. However, the epidemic has a
permanent and distressing influence on the overall economic performance. In industries
including tourism and associated businesses, manufacturing and construction, the impact of the
pandemic was substantial. Therefore in response to the pandemic, the central bank came up
with several policy measures like;

Immediate relief measures to long-term policy support to

ensure adequate liquidity.

Immediately reduced the Cash Reserve Ratio from 10 percent

to 7 percent.

Loan deferment.

Interest payment relief.

So for this case study our group has chosen loan deferment from all those tools implemented by
the central bank, since most of the individuals and businesses affected by the pandemic have
been benefited through this tool.

In a banking world they make profit with the help of two players of borrower and lender.
Financial institution uses the saving or deposits from the depositors and pays a certain amount
of interest rate to them for holding their money with the bank and then they use that
saving/deposited fund to lend money to other customers as loan. Bank charges their loan
customers a higher interest rate than what was paid to their depositors. Over a given period,
borrowers are asked to pay for their loans on an Equated Monthly Installment (EMI). And if the
payment is not paid on time, the days will be counted in the first month for some money. In
addition, when 90 days late payments have been made on loans, the non-performance of any
loan may be deemed also to be non-performing, in default or near default. With the emergence

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of new variation of COVID-19, a huge wave of pain and uncertainty has developed between
borrowers and creditors. Borrowers were not able to make their loan on time due to government

Imposing strict restriction and lockdown being imposed, people were left idle without any work
and it has lead to fall in income. Furthermore, with the autonomous expenditure being
independent, it must be met regardless of income. Therefore, with this concern being raised
Royal Government of Bhutan along with financial institute came up with the loan deferment
measurement.

A loan deferment allows borrowers to temporarily halt making payments on the principal
amount and interest on the borrowed loan. A loan deferment was first announced during the
press release from the Prime Minister’s Office (PMO) on June 30, 2020 stating that considering
All loans approved as of 30 June 2020 were eligible for the deferral with continuing impact and
uncertainty caused by the epidemic. With that the financial institutions have provided
deferment of loan with 1 percent rebate for regular repayment Equated Monthly Installment
(EMI) for 1 year to all borrowers. As of June 30 2020, last year, financial institutions loaned
out about Nu 162.927 billion (B). The NPL was 16 percent at Nu 26,616B, which are loans
with repayments late over 90 days.

As the pandemic continued deferment of loan repayments was further extended from July 2021
until June 2022. Eligible for deferral of the loan repayment for another year till June 2022 are
all loans sanctioned as at 30 June 2020. According to the press release, FSPs will not capitalize
the interest accumulated during the deferment period. In other words, the entire accrued interest
is not to be applied to the principle amount between April 2020 and June 2022. After the
conclusion of the deferral term, borrowers might pay equal payment interest.

With the loan deferment measure taken in by the central bank were able to help almost 99% the
borrowers in country who have been affected by the pandemic. With loans payment deferred
for two year (June 2020 to June 2022) it has helped to increase the income level of borrowers.
Like when financial institutions have provided deferment of loan with 1 percent rebate for
regular repayment Equated Monthly Installment (EMI) for 1 year to all borrowers 56,696
account holders were benefited. Moreover, Along with two year gestation period provided
the interest payment accumulated
will not be added to the Loan Deferment and Rebate
principle during the gestation period
so, this interest rate which actually
needs to be paid to bank goes as an Rebate
income to the borrowers. 40%
Full Deferment
Furthermore, people were able to 55%
spend their disposable income on
the autonomous consumption which Partial deferment
5%

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 needs to be met despite the any change in the level of income. Additionally consumers are also
able to save some amount of their disposable income precautionary motive like emergency and
unexpected situation such as current pandemic going on.

Rate
Interest
LM Curve
Interest
Rate of

A’
A’
Ii’ i’
;
A A
; i
Md’
i

Md

M Real Money Y Y’

Quantity of Money Income, Y

With the change in the level of income it leads to the change in money demand. Like at a given level
of interest the money demand has shifted outward indicating higher money demanded.

Here the Liquidity money curve (LMC) shows the increase in income leading to increase in interest.
income and interest has a direct relationl. When income increase money demand is more than money
supply, to execute the excess money demand to money supply the interest rate must be increased ( in
monetary policy interest rate plays an important role). Therefore, LM curve explains that increase in
income lead to increase in interest.

During the pandemic money

demand has drastically
increased. This means that
(Md) is more than money
supply (Ms). For that reason
Rate of Interest

now to bring the financial

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bank has increase the
interest rate.
 i’

i
Md2
Md1

M Real Money
Quantity of Money
Fiscal Policy

We will focus on tax relief as a fiscal policy in this project. The closure of the tourism sector
led to a substantially decrease in tax revenues during Covid-19. As a major source of tax
income, this helps to economic growth. As the epidemic had caused enormous damage to their
companies, the government decided to increase tax exemptions, particularly in Phuentsholing.
From 16 April 2020, taxes have been exempted. In the meanwhile, small company tax is
exempted in rural regions until 31 December 2024.The Ministry of finance declared on 31st
December 2020 that BIT (business income tax) for small and micro-businesses in rural areas
were exempted. 

The following table is the categorization for four main Thromdes and dzongkhag headquarters
to classify the size of business that has been created and is operating outside of the four-
cornered area.

Sector Category Investment Range Turnover Range

Trading Small Between Nu. 1-3million Less than Nu. 6 million
Micro Less than Nu.1 million Less than Nu.1 million
Manufacturin Small Between Nu. 1-10million
g
Cottage Less than Nu.1 million
Service Small Between Nu. 1-5million Less than Nu.10 million

Micro Less than Nu.1 million Less than Nu.1 million

Lockdowns resulted in decreased earnings for corporations, while salaries got reduced due to
less income. Furthermore, governments have deferred BIT (Business income tax) and CIT
(Corporate income tax). BIT is a tax on non-corporate businesses and incorporated business
organizations with a trade license or registration certificate from the Ministry of Economic
Affairs (MoEA) must pay BIT. It is imposed at a rate of 30% on net earnings. The CIT
(Corporate Income Tax) is a type of tax that applies to businesses. It is paid at a rate of 30% on
net profit for state-owned enterprises and 25% on net profit for other businesses.

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 During the pandemic, government taxes were decreased which resulted in an increase in
disposable income because it provides more money in households. Salaries were reduced and
business incomes were low but due to tax relief, people could keep the income they earned to
save or spend. To those people who were earning less and were jobless due to the covid-19
government started supporting them financially i.e. Druk Gyalpo Relief Kidu. In the month of
April, Nu. 161.3 million has been given and all the people applying for Druk Gyalpo Relief
Kidu will receive the fund. 

Before the pandemic started Government spending ratio to GDP in the year 2019 was 25.5%
but after the covid-19 hit our country it increased significantly to 32.28%. An increase in
Government spending is that the government provided free quarantine facilities for the citizens
of Bhutan who were in foreign countries came back due to covid-19. 

A A’

Reduction in tax by the government has lead to shift in planned expenditure/ demand. With the
increase in the peoples with more supply has come into and hence forth the production level
also increases. Due to increase in the production level ultimately the level of the income
increases and this cycle keeps on going in the economy. It’s explained by the multiplier effect.

𝛥f is autonomous spending done by the government. In the diagram above we can see there was an
f

increase in government spending due to that it is likely to increase aggregate demand (Y-axis). Which
also increases the income by Y Y IS curve denotes the good market and it shifts to the right side
0- 1?

because
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g ea decrease in tax and an increase in government spending.  
Federal taxes have a direct impact on the gross national Product (GNP), which is a measure of a
country’s wealth. To examine how taxes affect total output of the aggregate demand is:
 GNP=C+I+G+NX

As we know decrease in tax leads to rise in disposable income, allowing consumers to spend
more money, therefore boosting GNP. As a result of lower taxes, the aggregate demand curve is
pushed upwards, as consumers want more products and services with their increased disposable
income

the government will refund the excess payments and deductions to tax payers as per the Income
Tax (Amendment) Act 2020 from the date the Bill was introduced in Parliament.

From the day the Bill was tabled in Parliament, the government would refund excess payments
and deductions to taxpayers under the Income Tax (Amendment) Act 2020.

Under Income Tax Act 2020, the government declared that they will refund excess payments
and deductions to taxpayers. The following figure is followed for the tax paper:

Government has come up with the decision for people with salaries under Nu. 25,000 do not
need to pay for PIT (Personal income tax). PIT is a tax imposed on the individual from the
income they earn. Due to change in PIT, it has cost the country Nu. 230-240 million.
Those who sold their property after January 16, 2020, are entitled for a return of 2% of the sales
price. This is due to property transfer tax has been cut from 5% to 3%. In a similar way, car
ownership transfer tax has been deducted from 5% to 1%.

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On state-owned corporations the CIT (corporate income tax) has decreased from 30% to 25%.
Overall, the government loss estimated is Nu. 850 million annually. 

Recommendation
The tools used by our central bank and our government is good enough to control and attain
economic equilibrium. However, it is always wise to use different tool which can be more
productive in the working environment. Different Country will follow different tools to bring
stability in the economic room. Therefore following are the few recommendations to the
government and the central bank to implement for the betterment of the economic growth of the
country;

 Government should reduce the income tax to see the growth in the economy. Paying
huge amount of personal income taxes will lead to low living standard thereby making
the economic status low.
 In Bhutan kidu is being used as one of the tool to help the low income earner, as of
April 2021 Nu. 9.18B was given as the DrukGyalpo’s Relief Kidu however, some of the
people are misusing the opportunity. Even the high income earners are receiving the
kidu and saying that they are unemployed. Therefore, rather than giving kidu
government should provide the public with basic necessities.
 Lowering the interest rate should be implemented to keep the economy stable.
(https://www.atlantafed.org)

Literature Review
Lowering interest rate is recommended by our group because this tool has been seen effective
in the New York City.

Lowering Interest Rates

The Federal Open Market Committee voted  on March 15 to lower the effective rate to a range
of 0%-0.25%. The fed funds rate is the key interest rate you hear about when the Fed lowers
rates, and changes in that rate affect interest rates throughout the economy.

Keeping Markets Functioning

The New York Fed is working to support the flow of credit  to households and businesses and
the overall U.S. economy during this challenging time. It is doing so by implementing monetary
policy as directed by the Federal Open Market Committee (FOMC), administering a number of
Federal Reserve facilities that provide liquidity to a range of markets, developing critical
research and analysis, and supporting communities in the Second District. (Includes detailed
FAQs w/ special email addresses for questions on CPFF, PDCF, PMCCF, SMCCF, FIMA
REPO FACILITY).

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Through the Money Market Mutual Fund Liquidity Facility, or MMLF, the Boston Fed will
make loans available to eligible financial institutions,  secured by high-quality assets
purchased by the financial institution from money market mutual funds.

The Federal Reserve has made changes to its discount window.  Federal Reserve lending to
depository institutions (the discount window) plays an important role in supporting the liquidity
and stability of the banking system and the effective implementation of monetary policy.

New York City

Conclusion
To conclude monetary and fiscal policy works hand to hand in our country. The very purpose of
doing this research was to find out the tools used under monetary and fiscal policy in our
country especially during the pandemic. After doing this project we came to know the meaning
of monetary and fiscal policies and also understood how the tools are being used by the central
bank and by the government. We mainly focused on loan deferment and tax reduction tools for
monetary and fiscal policy respectively. Under those two tools we learned how really those
tools do helps in stabilizing the economy of the country.

According to monetary policy, the government's loan deferral mechanism was used during the
pandemic. As of December 2020, a total of Nu 125,70 billion of 83,464 accounts had
deferments. Through proper study on monetary policy we came to know how central bank helps
in money supply in economy in order to main proper economic growth and to bring stability.

We chose tax relief for this case study is because it is the most relevant fiscal policy that has
been implied in our economy during this pandemic. Through this policy it helped the people
with low income to save their income during the pandemic. Government reduced taxes and
increased their government spending by providing facilities for instance free quarantining
services and free flu checkups

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Reference

Monetary Policy Statement of Bhutan. (2021). Bhutan https://www.rma.org.bt/RMA

%20Publication/MPS/Monetary%20Policy%20Statement%202021%20final.pdf

National Accounts report. (2020). Bhutan National-Accounts-Report-2020.pdf

O'Neill, A. (2021, April 21). Bhutan: Ratio of government expenditure to gross domestic
product (GDP) from 2016 to 2026. Statista. https://www.statista.com/statistics/527285/ratio-of-
government-expenditure-to-gross-domestic-product-gdp-in-bhutan/

Palden, T. (2021, July 21). Loan deferment extended by one more year. Kuensel.
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Rai, R. (2021, January 4). Small businesses in P/Ling eyeing tax exemption.
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fbclid=IwAR2gQwa_yYMMWRie1TDxAqErSWiV4A54pIqmMbr9PxEvLYQOhgryrvby1SM

Subba, M. (2020, May 30). Tax reforms applicable retrospectively from Jan 16. Kuensel.
https://kuenselonline.com/tax-reforms-applicable-retrospectively-from-jan-16/

Subba, MB. (2021, February 12). High-level committee finalises framework to resolve NPL.
Kuensel. https://kuenselonline.com/high-level-committee-finalises-framework-to-resolve-npl/?
fbclid=IwAR3qU71rsoA_gNokeeEichxmqtNMESSsPQci0AC2l-r2xcTJY9lHbDORno0

Subba, MB. (2021, August 07) NPL improves with EMI deferment. Kuensel.
https://kuenselonline.com/npl-improves-with-emi-deferment/?
fbclid=IwAR2Dyc5j6J1t02dLGdhuWMiRDXXSFhzvSDEXHxYetMmUd4zKKiPE1cd5wkc

THANK YOU

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