Bhutan: Selected Issues

Publication Date: July 01, 2014
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Summary: SUMMARY The first chapter describes the current tax system and suggests options for tax policy reform in Bhutan. Though significant hydropower revenues are expected in the medium term as major projects come on-stream, reforms to the existing tax system in the interim will generate fiscal room and prevent recourse to domestic debt to finance development needs. Key reforms include reducing tax exemptions in the near term and introduction of VAT in the medium term. The second chapter analyses the adequacy of international reserves in Bhutan using a customized risk-weighted metric. The results indicate that Bhutan’s reserve levels are ample. Notwithstanding this adequate buffer, there are significant challenges to reserve management as hydro-related debt service is lumpy and there is a currency mismatch between the composition of reserves and that of trade and debt service flows which can create short-term pressures. The third chapter looks at the prospects for diversification of growth in Bhutan. Dependence on hydropower is set to increase, and exports will likely continue to become less diversified. As well, employment gains from hydropower generation are limited. Potential alternative sources of growth to hydropower—such as tourism, agri- business, and energy intensive activities—do exist, but require policy interventions addressing key structural deficiencies such as shortage of skilled labor and access to finance and an effort to address other business climate issues.
Series: Country Report No. 14/179
Subject(s): Tax policy | Tax reforms | International reserves | Economic growth | Indirect taxation | Reserve management policy | Export diversification | Selected Issues Papers | Bhutan

Publication Date: July 01, 2014
ISBN/ISSN: 9781498342254/1934-7685 Format: Paper
Stock No: 1BTNEA2014002 Pages: 29
US$18.00 (Academic Rate:
US$18.00 )
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