ESP loan delays in Bhutan lower debt growth forecast

Last Updated on January 4, 2025 7:31 am

The finance ministry has revised the credit growth projection for the fiscal year 2024-25 downward by 3.4 percent to Nu 10.48 billion, mainly due to delays in the disbursement of Economic Stimulus Programme (ESP) loans.

The revision, based on the ministry’s September update, contrasts with its earlier projections in June, which anticipated robust loan disbursements across sectors to drive economic growth.

However, the anticipated disbursements under the ESP loans did not materialise as planned.

Among the sectors, loans to manufacturing saw the highest growth, with an increase of Nu 8.16 billion to Nu 80.24 billion as of September last year from the same month of the previous year.

This was followed by the housing sector, which grew by Nu 7.33 billion to Nu 206.3 billion, and the hotel and tourism sector by Nu 3.93 billion to Nu 88.51 billion.

The significant growth in the manufacturing sector was because of expansion of manufacturing activities while the lifting of the loan moratorium in July last year increased the housing sector credit.

The increase in credit to the hotel and tourism sector is a sign of the gradual recovery of the tourism industry, albeit at a slower pace, the ministry stated.

Conversely, loans to contractors declined by Nu 3.75 billion, which is mainly attributed to the financial year’s initial phase, which typically involves tendering construction projects.

The transport sector also saw a decline of Nu 755 million, with rising vehicle prices and growing non-performing loans discouraging banks from extending credit.

Education sector loans at Nu 30.78 billion and agriculture sector loans at Nu 15.11 billion also saw notable decline in September last year from the same month of the previous year.

This was mainly because of a reduction in the number of applicants for third-country universities while delays in disbursement of ESP loans resulted in decline in loans for the agriculture sector.

Despite the delay, the finance ministry anticipates an uptick in sectoral credit by the second quarter (October to December) 2024, driven by government investments and extension of ESP loans.

As of June 2023, the banks reported liquidity of Nu 24.53 billion after accounting for the cash reserve ratio, with Nu 17.96 billion required cash reserves.

For the fiscal year 2024-25, liquidity is projected to decrease due to the lifting of the loan moratorium and an anticipated increase in economic investments. In the next fiscal year 2025-26, liquidity is expected to further decline, driven by increased investment activities.

The liquidity reduction is influenced by the planned reinstatement of the sweeping arrangement, which had been halted temporarily in June 2023 to address the immediate liquidity shortfall in the banking sector.

The Royal Monetary Authority plans to reintroduce the sweeping mechanism next year, which is anticipated to tighten excess liquidity in the banking sector.

A sweeping mechanism is a central bank’s monetary tool used to manage the amount of money circulating in the banking system. It involves the central bank temporarily withdrawing excess funds from commercial banks by increasing reserve requirements or issuing short-term securities, aiming to control inflation and stabilise the economy.

Among the financial institutions, Bank of Bhutan Limited holds the largest share of liquidity, accounting for over 30.62 percent, followed by Druk PNB Bank Limited at 27.89 percent and Bhutan Development Bank Limited at 20.97 percent.