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Mega projects undertaken by Bhutanese entrepreneurs can now loan money from foreign sources

Come February, Bhutan will see private entrepreneurs and organizations borrowing from each other and from foreign sources.

Following strong requests from the private sector that the local banks were not able to meet financial requirement for mega projects which require exorbitant funds, the cabinet has approved in principle what is called the ‘Intra-corporate borrowing and external commercial borrowing’

The Royal Monetary Authority (RMA) has been directed to frame guidelines and the modalities of the resolution.

Intra-corporate borrowing takes place when an organization borrows from another organization which has excess money at its disposal for a fixed period of time. Higher interest rates are charged for shorter period of time and vice versa.

Further, external commercial borrowing is a process of borrowing from foreign sources to meet a country’s internal financial need.

“The government wanted to be accommodating to the private sector,” said the officiating cabinet secretariat, Sonam Wangchuk.

He added that the private sector always had the impression that they could get the required huge funds from external sources at more favorable conditions than domestic commercial banks.

The decision comes at a time when the country has a lot of extra-large projects in the pipeline. Talking to Business Bhutan, the Minister of Works and Human Settlement, Lyonpo Yeshey Zimba, said that henceforth the government will encourage private sector participation especially in million dollar hydropower projects.

Bhutan currently has about a dozen of hydro power projects lined up before a deadline of 2020.

Meanwhile, the chief executive officer of the Bhutan National Bank, Kipchu Tshering, said financial institutions in the country would not be able to finance a single hydro power project.

“Borrowing from outside should not affect us,” he added that, however small borrowing must be regulated to the interest of the local banks.

Officials of the central bank, the royal monetary authority (RMA), maintained that, it may take about a month before we see foreign currencies build Bhutanese infrastructures.

In August last year, a prolonged discussion between the government and the private sector centered on external commercial borrowing as an alternate source of financing.

During the discussion the central bank had warned that external borrowing didn’t make much sense for an import-oriented economy like Bhutan and that it was also risky for the country to do so.

The central bank then had also informed the private sector that Bhutan is a signatory of the articles of agreement of the International monetary fund (IMF) and that Bhutan’s status is under article 14 which restricts capital transactions, particularly the free movement of capital.

Here, allowing external commercial borrowing would mean that Bhutan come under the Article 8, which removes all restrictions on capital movement.

An economist who spoke to Business Bhutan said that this will mean that Bhutan will participate in a “very volatile capital market.”

He said that even regional giants like India don’t have complete freedom over capital movement.

In India, external commercial borrowings can be used for any purpose except for investment in stock market and speculation in real estate.

Back in August last year, the private sector asked the government to provide a roadmap for building contractors’ capacity.

“There is great risk that our Bhutanese contractors are never going to gain experience in the hydropower sector if nothing is done today,“  said an representative of the construction industry at the meeting.

The private sector pledged the government for a policy of external commercial borrowing but with conditions.

Meanwhile, the potential external lenders for Bhutan include Asian Development Bank (ADB), International Finance Centre (IFC), the World Bank and Danida.

Some of the companies, which have borrowed from external markets in the past, are Aman-Kora Resorts, Bhutan Dairy Limited, Bhutan Ferro Alloys Limited, Bhutan Development Finance Corporation limited, Bhutan Telecom Limited and the Bhutan Power Corporation Limited.

In the government sector, Bhutan’s external borrowing, all on concessional terms, started in the early 1970s from institutions like the World Bank, the Asian Development Bank and the International Fund for Agricultural Development and bilateral sources like India, Austria, and Denmark.

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