FINANCING NEEDS & GAPS IN BHUTAN

National Workshop:Supporting Asia-Pacific LLDCs And Bhutan In Mobilizing Resources For The SDGs

December 11, 2018

Bhutan, Thimphu

Lali Gogoberidze

1. Infrastructure Financing Needs & Gaps

2. Private Sector Financing Needs & Gaps

2

COMMON CHALLENGES & NEEDS OF LLDCS § Geographical disadvantages and remoteness

§ Underdeveloped infrastructure

§ High transportation costs & limited access to the global markets

§ Low level investment and FDI

§ Low level of inclusion in global value chains

§ Low level of diversification

§ Lack of modern technologies, innovation and needed skills

§ …….

3

Challenges

§ Access to high quality infrastructure

§ Improvement of efficiency in infrastructure financing

§ Diversification of economy

§ Attraction of FDI

§ Inclusion in global trade & value chains

§ Improvement of access to finance

§ ….

Needs

SOME CHARACTERISTICS OF LLDCS

4

LLDCs Population 000'

Area( km2)

Population Density (per km2)

Distance from Ports

Range (km)

GDP mln current pr. $

GDp Per Capita current pr. $

GDP growth rate %

Afghanistan

35,530 652,864 54.4 1 200–1 60020,270 623 -2.4

Armenia 2,930 29,743 102.9 800–2 40010,529 3,489 3

Azerbaijan 9,828 86,600 118.9 80053,049 5,439 0.7

Bhutan 0,808 38,394 21.2 8002,074 2,677 5.2

Kazakhstan

18,204 2,724,902 6.7 3 500181,754 10,312 1.2

Kyrgyzstan 6,045 199,949 31.5 4 500–5 2006,572 1,106 3.5

Lao PDR 6,858 236,800 29.7 600–75012,585 1,850 7.6

Mongolia 3,076 1,564,116 2 1 700–6 00011,758 3,973 2.3

Nepal 29,305 147,181 204.4 1 100–1 20020,658 725 2.7

Tajikistan 8,921 142,600 63.7 1 500–2 5007,853 926 4.2

Turkmenistan

5,758 488,100 12.3 4 50037,597 6,997 6.5

Uzbekistan 31,911 448,969 75 2 70069,004 2,308 6.8

Source: UN Data 2017

INTERNATIONAL TRADE

§ International trade policy is one of the key factors, which has special importance for LLDCs

§ Tariff and non-tariff barriers play an important role, influencing on cost of goods and services and on FDI, especially for countries, having small market

§ Main export commodities of Bhutan: electricity, iron and steel, mineral fuel and inorganic chemicals

§ Bhutan’s export of manufactured goods exceeds export of raw materials and constitutes 50.9% of total export ü In difference with the most of other

LLDCs

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LLDCs ShareofMerchandiseExportsinGlobalTrade

(%)

Exportswithintheregion(%)

2015

Afghanistan 0.004 91.3

Armenia 0.013 29.9

Azerbaijan 0.089 38.9

Bhutan 0.003 84.9

Kazakhstan 0.273 64.9

Kyrgyzstan 0.010 84.0

LaoPDR 0.022 96.8

Mongolia 0.035 88.5

Nepal 0.004 73.8

Tajikistan 0.007 66.3

Turkmenistan 0.039 94.3

Uzbekistan 0.059 62.5

TradeIndicators2017

3.9

21.2

41.7

26.7

35.8

27.325

55.6

3.6

17.319.3

15.8

0

10

20

30

40

50

60

Afghanistan

Armenia

Azerbai jan

Bhutan

Kazakhstan

Kyrgyzstan

LaoPDR

Mongolia

Nepal

Tajikistan

Turkmenistan

Uzbekistan

ESCAP Aggregates24.4%

MerchandiseExporttoGDP2017(%)

Source:ESCAPstatistics

Source:SelectedIndicatorstoMonitortheViennaProgramme ofAction2017and2018

INTERNATIONAL RATINGS

6

167154

126

110

81 76 74 70

4128 25

47.7751.26

57.115…

66.08 67.4 67.74 68.3375.37 77.89 78.64

0

10

20

30

40

50

60

70

80

90

0

20

40

60

80

100

120

140

160

180

Afga…

Lao…

Tajik…

Nepal

Bhut…

Uzbe…

Mon…

Kyrg…

Azer…

DTFScores

Ranking

Best

WBDoingBusiness2019

WBLogisticsPerformanceIndex2018

26

103 107122 122 122

135 135

157 161 167177

0

20

40

60

80

100

120

140

160

180

200

Bhutan

Mongolia

Armenia

Azerbaijan

Kazakhstan

Nepal

Kyrgyzstan

Laos

Uzbekistan

Tajikistan

Turkmenistan

Afghanistan

Highlycorrupted

TICorruptionPerception2017

160 149 134 126 130 121 108 99 92 82 71

1.95

2.172.34 2.41 2.37 2.5

2.55 2.58 2.612.7

2.81

0

0.5

1

1.5

2

2.5

3

0

20

40

60

80

100

120

140

160

180

Afganistan

Bhutan

Tajikistan

Turkmenistan

Mongolia

Nepal

Kyrgyzstan

Uzbekistan

Armenia

LaoP.D.R.

Kazakhstan

Score

Rank

1. Infrastructure Financing Needs

7

INFRASTRUCTURE INVESTMENT NEEDS GLOBALLY

§ McKinsey & Company – approximately $ 57 trillion investment to meet infrastructure development needs for 2013-2030

üWhich is 60% above the volumes of investment implemented during last 18 years

§ ADB - $ 26 trillion during 2016-2030 for developing countries in Asia, with USD 1.7 trillion investment per year

§ WB - $1.3 trillion annually for the next 5-6 years

§ OECD – a gap of $400-500 billion with a total current spent of about $800-$900 billion annually

8

ACCESS TO INFRASTRUCTURE AND NEEDS

9

0

0.1

0.2

0.3

0.4

0.5

0.6

Kazakhstan

Azerbaijan

Armenia

KyrgyzRepublic

Uzbekistan

Tajikistan

Bhutan

Turkmenistan

Mongolia

LaoP.D.R.

Nepal

Afghanistan

Scores

Developingcountriesaveragescore:0.431

Countries withspecialneeds averagescore:0.288

AccesstoPhysicalInfrastructureIndex2015

Source:UNESCAP

Countries Score Rank

Kazakhstan 0.520 6

Azerbaijan 0.476 9

Armenia 0.453 11

KyrgyzRepublic 0.370 21

Uzbekistan 0.365 22

Tajikistan 0.309 26

Bhutan 0.269 29

Turkmenistan 0.269 29

Mongolia 0.235 32

LaoPDR 0.225 34

Nepal 0.217 35

Afghanistan 0.072 40

0% 5% 10% 15% 20% 25% 30% 35%

AfghanistanArmenia

Azerbai janBhutan

KazakhstanKyrgyzRepubl ic

LaoPDRMongolia

NepalTajikistan

TurkmenistanUzbekistan

%ofGDP

2018-2030

Transport Energy ICT WSS

InfrastructureFinancingNeeds

Source:Economies

Transport Energy ICT WSS Total

Afghanistan 10% 12% 6% 1% 29%

Armenia 1% 1% 1% 0% 3%

Azerbaijan 1% 1% 1% 0% 3%

Bhutan 4% 3% 1% 0.1% 8%

Kazakhstan 1% 1% 0% 0% 2%

Kyrgyz Republic 10% 5% 3% 1% 19%

Lao PDR 4% 4% 3% 0% 10%

Mongolia 2% 2% 1% 0% 5%

Nepal 7% 8% 4% 0% 19%

Tajikistan 3% 6% 4% 1% 15%

Turkmenistan 3% 2% 0% 0% 5%

Uzbekistan 2% 3% 2% 1% 7%

OFFICIAL DEVELOPMENT ASSISTANCE

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ODAreceivedbyLLDCs,mlnUSD

0 5000 10000 15000 20000 25000 30000

ArmeniaAzerbaijanKazakhst anKyrgyzstanTajik istan

Turkmenist anUzbek istanMongoliaLao PDR

Afghanist anBhutanNepal

2012-2016

2012 2013 2014 2015 2016

ODAFinancing2012-2016 (gross,mlnUSD)

Armenia Azerbaijan Kazakhstan Kyrgyzstan Tajikistan Turkmenistan

Uzbekistan Mongolia LaoPDR Afghanistan Bhutan Nepal

Total ODA received by Bhutan in 2012-2016 - $ 577.90 mln

WHAT SHOULD THE GOVERNMENT FINANCE?

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ICT ?WaterEnergy ?Roads

OPTIONS FOR CLOSING FINANCING GAPPublic

Sources

Borrowing

Budget

Private Sources

PPI

PPP

Invest efficiently

Maintenance

PIM

OPTION 1. FOR CLOSING FINANCING GAP

Public Sources

Borrowing - Donors

Budget

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Revenue(% of GDP)

Revenue, excluding

grants (% of GDP)

Grants (%of GDP)

Tax revenue

(% of GDP)

Current Expenditures

(% of GDP)

Capital Expenditures

(% of GDP)

Net lending (+) / net

borrowing (-) (% of GDP)

Afghanistan 54.0 10.1 43.9 7.6 36.9 18.4 -1.3

Armenia 23.7 23.1 0.7 20.9 25.1 3.4 -4.7

Azerbaijan 34.2 34.2 0.0 15.6 24.8 12.1 -2.7

Bhutan 26.6 19.0 7.5 13.8 18.9 8.5 -0.8

Kazakhstan 14.1 13.7 0.4 9.8 15.5 1.0 -2.4

Kyrgyzstan 32.4 30.1 2.3 16.8 27.2 6.2 -1.0

Lao PDR 20.3 15.8 4.5 13.5 14.9 9.2 -3.7

Mongolia 23.4 22.6 0.9 11.8 24.0 4.1 -4.7

Nepal 21.1 19.3 1.8 16.7 15.9 4.2 1.1

Uzbekistan 25.3 25.3 0.0 17.5 19.4 2.5 3.4

East Asia & Pacific 17.0 16.3 0.6 11.9 18.1 0.9 -2.0

East Asia & Pacific (excluding high income) 16.2 16.1 0.1 10.1 16.4 0.6 -0.7Europe & Central Asia 35.3 33.4 1.9 19.1 35.6 1.5 -1.9

Europe & Central Asia (excluding high income) 31.7 27.6 4.2 14.1 30.2 2.8 -1.3

Source: World Development Indicators 2018 and author’s calculation

• General government debt to GDP is high – about 93% (5 years average 2012-2016)

• Concessional financing share in Bhutan’s total foreign debt: 20%

• CAD: around -26% (5 years average 2012-2016)

FISCAL CONDITIONS

§ Forthcoming graduation from Least Developed Country status raise important policy issues

§ Fiscal policy in Bhutan is broadly prudent (~ -1% of GDP in 2018; +2.2% in 2019);

§ Debt distress evaluated as moderate (~100% of GDP);

§ Domestic public debt market is small

§ Tax-to-GDP ratio is maintained under 15%, but is declining in coming years;

§ Bhutan is receiving extensive IMF support for implementing the GST (goods and service tax)

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OPTION 2. FOR CLOSING FINANCING GAP

Private Sources

PPI – Private Participation

in Infrastructure

PPP – Public Private

Partnership

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§ Deregulation

§ Low taxes

§ Eliminated corruption and Red Tape

§ Correctly defined tariffs

§ Privatization

§ Mostly positive experience worldwide

§ Effective tool for public infrastructure financing – leveraging private finances

§ PPP framework is must

§ According to Knowledge Lab There are two PPP projects of USD218 million value

OPTION 3. FOR CLOSING FINANCING GAP

Invest efficiently

Maintenance

PIM

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1. Fiscal Rules

2. National & Sec toral Planning

3. Central-Local Coordination

4. Management of PPPs

5. Company Regulation

6. Multiyear Budgeting

7. Budget Comprehensiveness

8. Budget Unity9. Project Appraisal

10. Project Selection

11. Protection of Investment

12. Availability of Funding

13.Transparency of Execution

14.Proje ct Management

15. Monitoring of Assets

EMs World

1. Private Sector Financing Needs

16

BUSINESS FRIENDLY ENVIRONMENT

§ Natural restrictions - small geographic and respectively - market size § Response: Open markets, Free trade agreements, Customs, ER Controls…

§ Tax administration

§ Corruption Free

§ Doing Business

§ Exchange Rate Control

§ Control on capital repatriation

§ Access to finance:§ Financial Sector§ Capital Market

17

FOREIGN DIRECT INVESTMENT - FDI

18

(4,500) (2,500) (500) 1,500 3,500 5,500 7,500 9,500 11,500Afghanistan

Armenia

Azerbaijan

Bhutan

Kazakhstan

Kyrgyzstan

LaoPDR

Mongolia

Nepal

Tajikistan

Turkmenistan

UzbekistanFDIinLLDCs2017-2017

$mln

2017 2016 2015 2014 2013

14.00

32.00

17.00

(13.00)

10.00 0.8

1.6

0.8

-0.6

0.5

-1

-0.5

0

0.5

1

1.5

2

(20.00)

(15.00)

(10.00)

(5.00)

-

5.00

10. 00

15. 00

20. 00

25. 00

30. 00

35. 00

2013 2014 2015 2016 2017 Shar

e in

GD

P %

$ m

ln

FDI in Bhutan 2013-2017

FDI share in GDP is low compared to LLDCs average

FDI/to GDP ratio average

§ Bhutan: 0.6%§ LLDCs: 3.7%

ACCESS TO FINANCE

§ World Bank’s Investment Climate Assessment in 2016 identified access to finance, access to skilled labor, and access to externalmarkets as three binding constraints.

§ The ngultrum’s (BTN) peg to the rupee has served the economy well; About three-quarters of public external debt is denominated in Indian rupees, and both exports and imports are predominantly with India (70–90 percent).

§ The financial performance of the banking sector remains weak but risks appear contained overall.

§ Bhutan began implementing Priority Sector Lending (PSL)

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0.000.100.200.300.400.500.600.70

0.000.100.200.300.400.500.600.700.800.901.00

Armenia

Azerbaijan

Bhutan

Kazakhstan

Kyrgyzstan

LaoPDR

Mongolia

Nepal

Tajikistan

Turkmenistan

Uzbekistan

Financ ialInsti tDepthFinanc ialInsti tAccessFinanc ialInsti tEff icienc y

FinancialInstitutions'Indexes

Bhutan: Financial Institution Index: 0.37§ Financial Institution Depth – 0.11§ Financial Institution Access – 0. 32§ Financial Institution Efficiency – 0.71

0.000.050.100.150.200.250.300.35

0.000.100.200.300.400.500.60

Armenia

Azerbaijan

Bhutan

Kazakhstan

Kyrgyzstan

LaoPDR

Mongolia

Nepal

Tajikistan

Turkmenistan

Uzbekistan

FinancialMarketIndexes

FinancialMarketDepth FinancialMarketAccess

FinancialMarketE fficiency FinancialMarkets

Bhutan: Financial Market Index: 0.03§ Financial Market Depth – 0.09§ Financial Market Access – 0. 00§ Financial Market Efficiency – 0.00

Financial Development Index 2017

DF Index 0.20

MSME FINANCING NEEDS AND GAPS IN LLDCs

LLDCs* MSMEGap%ofGDP

CurrentSupplyofFinanceUSDmln

CurrentDemandforFinanceUSD

mln

MSMEFinanceGapUSDmln

SMEFinanceGapUSDmln

MicroFinanceGapUSDmln

Afghanistan 24 32 4,723 4,723 2,995 1,728

Armenia 11 1,266 2,411 1,145 1,016 129

Azerbaijan 13 6,895 13,700 6,805 5,207 1,598

Bhutan 5 192 284 91 83 9

Kazakhstan 26 9,510 56,581 47,071 43,352 3,719

Kyrgyzstan 21 92 1,496 1,404 1,389 15

LaoPDR 21 439 3,048 2,609 1,166 1,442

Mongolia 11 699 1,992 1,293 1,240 53

Nepal 17 731 4,332 3,601 2,857 744

Tajikistan 18 240 1,691 1,452 1,219 233

Turkmenistan N/AN/A N/A N/A N/A N/A

Uzbekistan 18 1,732 13,522 11,790 10,159 1,631

Total 21,828 103,779 81,984 70,684 11,301Average 17 1,984 9,434 7,453 6,426 1,027

EastAsia-Pacific 18 2,754,833 5,142,496 2,387,352 2,109,501 277,851

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§ MSME financing gap in Bhutan: 5% of GDP

§ Lowest among LLDCs

CONCLUSION

§ What is done well§ Low Corruption§ Low taxes

§ Low unemployment§ Lower financing gap

§ What can be done better§ Trade liberalization

§ Exchange restrictions§ Tax system§ Financial sector health§ Doing business indicators

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Some General Recommendations:

Ø Enhance Private Sector Participation in infrastructure financing through the development of Public Private Partnership

Ø Development of capital market

Ø Support to increase of financial literacy

Ø Improve attractiveness for FDI in infrastructure and non-infrastructure sectors

Ø Encouragement of FDI-SMEs linkages

Ø Support to internationalization of SMEs

Ø Support to the development of tourism sector

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EndofPresentation