Quick thoughts on Nepal's FY2017 budget

Here is my quick thought on the FY2017 budget.

Finance Minister Bishnu Prasad Poudel presented budget for FY2017 (mid-July 2016 to mid-July 2017) to the parliament on May 29. The budget is focused on distributive programs, post-earthquake reconstruction and measures to diversify the economy through the provision of critical infrastructure (preliminary funds earmarked for key priority projects for preparatory work).

The budget is kind of unique in two ways: (i) a massive increase in spending targets with the inclusion of pet programs/projects that will have budgetary and macroeconomic consequences for years to come, and (ii) there is no notable plan to accelerate capital spending (without which the promises will remain a daydream).

FY2017 budget overview
GDP growth target (%)	6.5
Inflation target (%)	7.5
Budget allocation for FY2017	FY2017BE
	Rs billion	%
Budget allocation	1048.9
Recurrent	617.2	58.8
Capital	311.9	29.7
Financial provision	119.8	11.4
Projected total revenue	682.8
Revenue	565.9	82.9
Foreign grants	106.9	15.7
Principal repayment	10.0	1.5
Projected budget surplus (+)/deficit (-)	-366.1
Projected deficit financing	366.1
Foreign loans	195.7	53.5
Domestic borrowing	111.0	30.3
FY2016 cash balance	59.4	16.2

First, the budget outlay:  

The total expenditure outlay for FY2017 is NRs1048 billion (an estimated 39.5% of GDP), which is 28.1% higher than the budget estimate for FY2016. The FY2017 outlay comprises NRs617.2 billion for recurrent expenditures (58.8% of the total outlay), NRs311.9 billion for capital expenditures (29.7%), and NRs119.8 billion for financial provision (11.4%).

The substantially larger size of the budget is due the large increase in recurrent and capital spending. The outlay for recurrent expenditure (equivalent to 23.3% of GDP) is 42.2% higher than the revised estimated expenditure in FY2016. The planned capital spending has been increased by 96.1% over the FY2016 revised estimate (equivalent to 11.8% of GDP; normally actual capital spending is about 4.0% of GDP). About Rs140 billion is set aside for post-earthquake rehabilitation and reconstruction.

Second, revenue targets:

A total revenue target of NRs682.8 billion (25.7% of GDP) has been set for FY2017, including projected foreign grants of NRs106.9 billion (4.0% of GDP) and principal repayment of NRs10 billion. The revised estimate for revenue mobilization (including grants) in FY2016 was 23.5% of GDP.

Third, deficit financing:

The budget deficit is to be financed by foreign loans amounting to NRs195.7 billion, domestic borrowing of NRs111.0 billion, and FY2016 cash balance of NRs59.4 billion. Net foreign loans and net domestic borrowings are projected to be 6.4% and 3.5% of GDP, respectively. Overall, budget deficit is projected to be about 7.0% of GDP. 

Fourth, where is the recurrent budget going?

Almost 43% of planned recurrent expenditure of NRs617.2 billion is going to local bodies as grants (or transfers) to enable them to launch local level development works on their own (this is where pet projects and politically hinged programs are hidden). The other big ticket item is the compensation of employees, which takes up about 21% of total recurrent budget. These amount to an estimated 9.9% and 5.0% of GDP respectively.

Fifth, where is the capital budget going?

Almost 58% of the planned capital budget of NRs311.8 billion is going for civil works. About 29% is allocated for building work. These amount to an estimated 6.8% and 3.4% of GDP, respectively.

Sixth, the main takeaways from FY2017 budget are:

• The early budget adhering to the constitutional provision is a good start.
• The increase in capital budget for reconstruction and other infrastructure related work was as expected. It is a good strategy because  the capital budget allocation itself was low given the huge infrastructure deficit the country is facing (then there is a chronic issue of low absorption capacity). 
• Unfortunately, the expectation of a robust, credible and a time-bound implementation plan to spend the allocated money is missing. This issue should have been kept above mundane political pet projects and programs. It is not unique to this government.
• The GDP growth target may be achievable/ambitious (between 5% and 6% is within range if budget execution is above expectation) given the improving monsoon, normalization of supplies (which reinvigorates the services sector), planned spending on rehabilitation and reconstruction (acts as temporary fiscal stimulus), and most importantly the low base effect. But, the downside risks might weigh heavy if reforms and implementation of projects lag behind. 
• The inflation target is conservative because: (i) the increase in salary of public sector employees will heighten inflationary expectation, which will eventually result in upward pressure on prices of goods and services; (ii) the massive size of the budget itself (especially the distributive programs) will have similar effect (becomes a self-fulfilling prophesy); (iii) the increased demand for reconstruction related intermediate and final goods and services will put upward pressure on prices (given that domestic firms' capacity utilization is below 50% at present); (iv) the expected strikes are going to temporarily escalate prices; and (v) the new levy on petrol, diesel and aviation fuel (on top of the already high tariff) will put pressure on general prices of goods and services (note that diesel is still used to power up generators to run SMEs- a better option would have been to raise excise duty without increasing the final price like it was done in India and several other countries, especially when international prices are low.). These are both demand-side and supply-side factors that are not within the usual bound of the central bank. Let us wait for the NRB’s inflation target for FY2017 (I hope it will be a bit realistic). However, sustained low fuel prices and decline in prices in India remain another scenario, which would mean lower inflation or within the target.
• The new petroleum levy is intended for the Budhigandaki hydroelectricity project. The initiation of the huge reservoir type project is a good move, but the financing arrangement for it is very myopic. Inflation is already at high levels (thanks to supplies disruptions caused mostly by the trade blockade) and the massive increase in spending and hike in public sector salaries will put even higher pressures. The resources for the project should have been found by rationalizing recurrent spending together with issuance of construction bonds (as is the practice elsewhere). These two measures ensure relatively more accountability and do not disrupt market sentiment when compared to the new levy on petroleum fuel. The financing mechanism for the project economically does not look good to me. By the way, the government is already levying, on an average, the following tax rates (share of retail price): 35.4% in petrol/liter, 22.7% in diesel/liter; 7.9% in kerosene/liter; 26.2%/liter in ATF; and 18.4% in LPG/cylinder (these are tariff, VAT and excise duties as well as infrastructure development levy).
• Macroeconomy-wise, it looks like a mess: (i) an expenditure target the country cannot attain, especially the capital budget, and a bloated recurrent spending; (ii) an ambitious revenue target of about 20% annual growth; (iii) a massive increase in net domestic borrowing to about 3.5% of GDP (this is hitting its prudential limit now); (iv) a massive increase in net foreign loans (6.4% of GDP, up from 1.6% of GDP in FY2016); (v) an increase in inflation (given the existing assumptions about budget); and (iv) a surge in interest rates due to high borrowing (compounded by the resumption of normal banking activities, which will drastically lower the existing excess liquidity).



• The large increase in net foreign loans to finance reconstruction and other infrastructure related work is an indication of the dearth of domestic resources to sustain such large scale infrastructure projects and reconstruction work. Here is more.
• Notice that the budgetary estimate of foreign grants for FY2017 is lower than the FY2016BE. It reflects the drying up of grants (given the poor absorption capacity and preference of large multilateral donors to shift to more loans). 
• Importantly, it will be challenging for the next government to implement the budget. The government will face two seemingly insurmountable challenges: (i) no uptick in absorption capacity as the means to achieve it are clearly lacking in the budget; and (ii) the possibility of drying up of excess liquidity as businesses get back to normal. The former will make it hard for the government to increase capital spending beyond existing level. The latter will make it difficult for the government to raise money from domestic market (plus what would happen if the revenue target won’t be met?). I don’t see notable contingency planning. 
• More importantly, the next government will find it hard to reconcile FY2018 numbers during the preparation of budget because that one will be based on FY2017 budget (or its revised estimate), which is bloated with too many incoherent, small program and projects (especially welfare and distributive ones) that can’t be discontinued by successive governments. This year’s budget itself is on the highly optimistic side as the revised expenditure for FY2016 is simply unrealistic given the progress so far. If FY2018 budget is going to be larger than FY2017’s (which in all likelihood will be), then it will be challenging to find extra resources. It cannot increase spending at existing rate (especially unproductive recurrent spending). The tax revenue is not even sufficient to finance recurrent spending. FY2017’s planned recurrent spending is higher than the entire FY2015 budget. 

Why capital spending is chronically low and what can be done about it

It was published in The Kathmandu Post, 23 May 2016.

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Unspent budget

Political instability and interference both at the planning and operational levels hinder timely completion of projects

The government is unveiling budget for fiscal year 2016/17 at the end of May, one and a half months prior to the start of FY2017. The expectation is that it will give the government and bureaucracy adequate time to finish approval of programs and projects and subsequently speed up project implementation, resulting in higher spending at the end of the year. This is an important step to create the enabling environment for accelerating spending. However, policymakers should not lose sight of the other problems affecting spending capacity. 

The under-execution of capital budget is a chronic fiscal issue that is intertwined with politics, bureaucratic competence, management capability of contractors, governance and the maze of Acts and policies that are hindering timely, faster and efficient spending. The existing ecosystem for capital budget execution is obstructing, rather than facilitating, timely spending. 

Low spending

For a low income economy like Nepal that is struggling to close the infrastructure deficit, the low capital budget allocation and then dismally low absorption rates give a sense of the enormity of the problem. While the planned capital spending averaged 5.5% of gross domestic product (GDP) in the last five years, actual spending averaged just 4% of GDP. In FY2016, planned capital budget is around 9.3% of GDP (Rs208.9 billion), of which only 23% was spent in the first 10 months. A substantial portion of the Rs91 billion allocated for post-earthquake rehabilitation and reconstruction remains unspent.

It is not hard to notice three patterns here: (i) planned capital spending itself is lower given that Nepal needs to invest an estimated 8-12% of GDP annually in transport, electricity, water supply, solid waste management, telecom and irrigation to close the infrastructure gap; (ii) capital budget absorption capacity has been chronically low (about 75% of planned budget) for a long time; and (iii) persistent bunching of spending in the last few months of fiscal year (about 45% capital spending occurs in the last month and 65% in the last three months), raising red flags over not only low spending, but also the quality of spending.

Additionally, capital spending is far lower than recurrent spending, which stands at around 16% of GDP. Higher capital spending not only creates the fundamental for growth to take off and helps to usher in a meaningful structural transformation, but also boosts immediate demand for construction materials, increases production of intermediate goods, and generates jobs. It includes spending on civil works, building, plant and machinery, land, vehicles, furniture and fittings, etc. The growth jolt from recurrent spending is not as strong as that from capital spending. Recurrent spending consists of grant to local bodies (includes some capital spending as well), wages and salaries to government employees, interest and subsidy payments, social security, and operation and maintenance.

Unhelpful ecosystem

Politicians and senior bureaucrats lament the low capital spending and openly admit the chronically low absorption capacity, but still seek higher share of budget each year. In FY2017, the size of budget will likely be higher than Rs819 billion appropriated for FY2016 despite the fact that the existing mechanism won’t be able to spend it in full without rectifying the distorted ecosystem governing project selection, spending approval at the center and spending pattern at the local level.

Six major issues plague capital spending in Nepal. First, structural weaknesses in project preparation and implementation remains unresolved. Barely any substantial homework is done before the inclusion of projects and programs in budget, leading to allocative inefficiencies to begin with. For instance, projects of all nature (complex, large or piecemeal and of varying timeframe) are included in the budget on the basis of political priorities and not on economic imperatives (which requires a strong pipeline of projects ready for implementation subject to finance, knowledge and technology availability). Furthermore, these are usually not in sync with medium-term expenditure framework and the medium-term plans.

Second, low project readiness is another recurring problem as pork barrel and populist projects are inserted without feasibility studies and detail design, and time bound procurement plans and land acquisition plans. Third, bureaucratic hassle in approving and reapproving projects at various layers (sector ministries, Ministry of Finance and National Planning Commission) and weak intra and inter ministry coordination delay the full and effective realization of planned capital spending. Fourth, infrastructure projects of any scale and nature are riddled with poor project management, especially due to high staff turnover (which erodes institutional memory), lack of staff capacity to administer project implementation, lengthy procurement process, subpar capacity of contractor and weak contract management. 

Fifth, high fiduciary risks in project implementation in suburban and rural areas when projects are implemented through local government having limited human resources and administration capacity not only delays spending, but also makes it inefficient. The funds allocated to parliamentarians to spend in their constituencies fall in this category.

Finally, political instability and interference both at planning and operational levels hinder timely completion of projects. For instance, the recurring political meddling in the duties of the board of Nepal Electricity Authority and Kathmandu Upatkaya Khanepani Limited are two classic cases. Furthermore, unfruitful interference and inconclusive governance oversight by various parliament committees and Commission for the Investigation of Abuse of Authority disincentivize honest and committed public officials and contractors.

Scaling up spending

All of these problems cannot be solved overnight. However, few immediate steps could go a long way in mending this chronic problem. Since there will always be political element to program selection and inclusion of some pork barrel projects, this issue pops up in every budget cycle. However, the sector ministries, NPC and MOF could work on a common platform to improve allocative efficiency by sanctioning enough funds (with the flexibility of multi-year contract) for projects that are implementation-ready. Furthermore, monitoring and evaluation at all these government agencies could be made more effective than just clicking check boxes during review sessions. Finally, strong leadership especially by joint secretaries, who are normally project directors, secretaries and ministers is essential to effectively administer and complete a project.

Else, capital budget and the funds allocated for post-earthquake rehabilitation and reconstruction won’t be timely and efficiently spent. 

About domestic resources and infrastructure financing in Nepal

There has been a lot of debate about the use of domestic funds to finance large-scale infrastructure projects, especially hydroelectricity, roads and airports. Let me provide a brief background and readers can see for themselves which claims made by ‘experts’ hold water and which ones are impractical and outlandish. 

First, issue about fiscal space to finance large scale projects. Nepal has a very low outstanding public debt (about 25.6% of GDP), with internal and external debt stock amounting to 9.5% and 16.1% of GDP, respectively. The outstanding public debt decreased drastically from about 52% of GDP in FY2005. This was a result of faster repayment of principal and interest (due to high revenue growth rate but eroding low expenditure capacity). Now, given the huge infrastructure deficit and low per capita income, Nepal can afford to increase it by few percentage points and use those money in productivity-enhancing infrastructure projects. Here is brief study on increasing public debt by 10 percentage points to finance post-earthquake reconstruction without jeopardizing fiscal sustainability (that is, maintaining the present level of primary balance). 

To increase this limit further needs attention on two fronts: (i) a higher growth rate (ideally above 5%), concessional nature of external borrowing and higher remittance-financed imports, which then boosts revenue; and (ii) drastic enhancement of absorption capacity. 

On the first point, no comment on growth rate as we know well what drives it in Nepal. But, the concessional financing may be drying up. The ADB is phasing out concessional lending in few years and Nepal may have to borrow at a rate between concessional rate (for low income countries) and nonconcessional rates (for lower to middle income countries). The WB is also moving in the same direction. AIIB financing may not be as concessional as those from the ADB and the WB. We will have to wait and see that one. Bilateral financing may or may not be equally generous in terms of interest and maturity, but the downside is that there are hooks on procurement and utilization of funds.

On remittance-financed imports, remittance inflows may not be as stable as before given the continued slump in oil prices and fiscal strain in the countries where Nepali workers go for employment. Remittance inflow is already decelerating, i.e. its growth rate is decreasing although the amount is rising.

On the second point, without drastic enhancement of absorption capacity, even concessional financing won’t come (disbursement happens after government spends money, submits the bills or details of spending to donors and then gets reimbursed). And it is no secret that spending absorption capacity is receding in the last couple of years. So, yes POTENTIAL financing options are available, but REALIZING it is an entirely different ball game. It is not as simple as it sounds. 

What about domestic financing (from treasury savings), domestic borrowing and using some forex reserves? Again, utilizing these is linked to macroeconomic balance and fiscal space. Given the occasional fiscal surplus (even primary balance is in surplus) the government can afford to run fiscal deficit IF the additional money is used in productivity-enhancing infrastructure projects in an accelerated manner. This is more and more unlikely given the receding disbursement rates of major projects and the usual legal, institutional and political hiccups overpowering project implementation. 

A lot of folks are also talking about pooling in the liquidity in the market and household savings apart from those in the banks (as seen when several IPOs being oversubscribed in recent years) to generate funds for large-scale infrastructure projects. But then this liquidity is transitory because of the adverse market conditions. Domestic financing will quickly dry up as soon as real estate and trading activities regain momentum, and BFIs see a favorable credit demand with less socio-political risk. Another aspect associated with this is the domestic borrowing by government through the selling of bills and bonds. This cannot be extended beyond 2-2.5% of GDP to maintain fiscal stability. This is already being practiced (as the government targets to raise around Rs50 billion annually). Higher domestic borrowing by government will push up lending rates (not good for private sector and households as it stifles growth and then subsequently revenue and then finally the funds available for such projects—boomerang!).

Additionally, most of the savings are for short term, but infrastructure financing is for long term. So pooling in money to explicitly finance large-scale infrastructure projects is difficult as folks don’t want to wait for years to get financial benefit. This is different from IPOs, where folks want to purchase shares with an objective to trade it at higher prices after the moratorium on selling is over after few months. Also, banks will be unwilling to invest in large amount in long-term projects out of the short-term deposits. Can you see the asset-liability mismatch there (and the troubles BFIs would be in)?

Next, what about treasury surplus? Again, it is not as easy as it sounds as the government has been using a portion of it as “carry over from last year” to finance the burgeoning (recurrent) expenditure. Not a new thing, but its size will deplete as soon as the government spends more on other projects across the country. If we pin much hope on treasury savings, then we are basically saying lets decrease capital spending in the rest of the country, save the money and then use it in few of the large infrastructure projects. The treasury savings (about Rs50 billion in the first nine months of FY2015) are there because the government is raising revenue (thanks to remittance-finance imports and consumption) that it cannot spend on in infrastructure projects. It is not an additional bonus to domestic financing that you can use for large-scale infrastructure projects! Importantly, at the core of it, it does not solve the problem: the government is not able to spend the money it appropriates for various infrastructure projects across the country. The focus should be in resolving this aspect and ensuring that major projects on an average spend over 90% of allocated money (but not 60% of those in the last quarter; preferably at least 50% by the first seven months of fiscal year).

Finally, what about the forex reserves (about $10 billion as of the ninth month of FY2016). Nepal cannot use this like that because it needs to maintain enough reserves to finance around 7 months of import of goods and services (given the peg to the Indian rupee, to fend off external shocks and the opportunity cost of holding reserves). And the amount of reserves fluctuates depending on remittance inflows and the level of import of goods and services.  

Overall, yes some room for domestic financing is there, but not as high as is being perceived by folks out there.

Trade blockade was more damaging to Nepalese economy than the earthquake

The Central Bureau of Statistics (CBS) just released its GDP growth projection for FY2016. The growth projection is quite close to the latest IMF projection. It offers further clarity on the impact of the trade blockade and supplies disruption (which lasted for four and a half months) and the lingering effects of the earthquake.

Overall, GDP (at basic prices) is expected to grow at 0.8% in FY2016, lower than 2.3% in FY2015 (it is a revised figure, which provisionally was estimated at 3.0% after the earthquake). Agriculture sector is expected to grow at 1.3%, industry at a negative 6.4% and services at 2.7%. 

While the earthquake affected mainly central and western regions, the trade blockade and supplies disruption severely dented economic activities across the country. In this sense, the trade blockade and supplies disruptions were more devastating than the earthquake. Furthermore, the delay in distributing cash relief and housing grant, and in initiating reconstruction projects affected growth prospect. It itself was affected by the blockade as construction materials and fuel could not be imported. The trade blockade and supplies disruptions exacerbated the already weak economic activities and squeezed economic potential. Here are earlier blog posts on this issue: one year after the earthquake; impact of trade blockade on fiscal sector, and inflation and external sector

The debilitating impact of trade blockade and supplies disruptions is visible from the negative growth rate of mining and quarrying (-6.5%); manufacturing (-10.1%); electricity, gas and water (-1.7%); construction (-4.0%); wholesale and retail trade (-1.1%), and hotels and restaurants sub-sectors (-4.9%). Furthermore, within the services sector, growth rate of transport, storage and communications sub-sector was lower than in FY2015. 

All of these sub-sectors are import-dependent either for final goods or intermediate goods or raw materials (including petroleum fuel and cooking gas). The effect of these unexpected blows will linger on in the coming months as economic activities are severely disrupted and dislocated by the double whammy of earthquake and blockade/supplies disruption. The acceleration of reconstruction work will be a major factor to stimulate economic activities and to expand potential growth.

Given the reduction in paddy, wheat and millet production, the CBS's growth projection for agriculture sector looks optimistic. I think the revised figures later in FY2017 will show even lower GDP growth rate as figures are adjusted for agriculture and some services sub-sectors. It could be one of the lowest in the last few decades.

In FY2017, a lot will depend on the weather, normalization of imports and distribution networks (including fuel and cooking gas) and the scale and pace of reconstruction activities. The El Nino conditions are already contributing to droughts and forest fires have destroyed settlements and land. The monsoon rains may not be as plentiful as expected given the conditions so far. This is going to dent agricultural sector’s recovery. The bright spot is that reconstruction work may accelerate and housing grants may be finally distributed to all the eligible households. The former will stimulate domestic production of industrial goods and services. The latter will act as a direct fiscal stimulus that will increase consumption demand.

Also, both could reinforce each other and provide the necessary jolt to the sluggish growth rate. Fast recovery of the services sector will be contingent upon the rate of remittance inflows and normalization of supplies. Overall, considering these prospects and the low base effect, GDP growth could be around 5% to 6% (ambitious) in FY2017. The risk to this outlook is sluggish reconstruction work (plus budget execution), delayed normalization of supplies and a slowdown in remittance inflows. Realistically, it could be between 4% and 5%.

By the way, revised figure for FY2015 shows that real GDP grew by 2.3% in FY2015, meaning that the earthquake had a marginally large impact on the economy than previously estimated. Earlier, FY2015 growth was estimated at 3.0%, meaning that about 1.5% of growth was chopped off from the estimated growth of 4.6% in a no-earthquake scenario. Now, its 1.6% off the estimated growth of 3.9% in a no-earthquake scenario (the difference in pre-earthquake growth estimate is due to the updated actual figures for FY2014).

Structural change in China and its impact on other economies

Asian economies face headwinds from three weak factors: weak global recovery, weak global trade, and weak (rather moderating) Chinese growth. To deflect such headwinds, the economies need to focus on productivity-enhancing structural reforms, which are needed to rebalance demand-supply, reduce vulnerabilities, enhance efficiency, and to expand the frontier of potential growth. Meanwhile, monetary policies need to be harmonized not only in Asia, but among advanced economies as well.

What could be the potential spillovers from China’s economic transition toward a more sustainable growth? Note that China moving on this path (means living with slower growth than in the past years) would mean slower demand for raw materials and intermediate goods, which in turn means trouble for economies whose activities survive on exporting such goods to China (they are also facing slow global recovery [plus low commodity prices], which in turn is slowing down demand for final goods either made or assembled in China). Also China is beginning to produce more intermediate goods rather than importing them for use in final goods as before. The rebalancing of the sources of growth in the Chinese economy has consequences beyond its borders. 

China accounts for about one-half of regional growth and is an important factor in the regional supply chains.

According to the latest regional economic outlook, the IMF argues that:

• Asia has become more sensitive to the Chinese economy (which is moving away from high public investment and exports to higher domestic consumption and services). The rebalancing of Chinese economy will have adverse short-term effects in the rest of Asia. This may be less painful for economies that respond to Chinese consumption demand. 
• Estimates show that a 1 percentage point slowdown in Chinese growth translates into a 0.15–0.30 percentage point decline in growth for other Asian countries in the short term. Taiwan, South Korea and Malaysia are likely to be affected the most.
• Commodity exporters such as Australia, Indonesia, Malaysia and New Zealand will suffer from slowdown in Chinese economy (as it imports a lot from them) and lower global commodity prices.
• Disruption to the financial sector in China also poses risks to the global economy. Rapid credit growth, high levels of NPLs, large shadow banking, and growing corporate and local government debt may be disruptive and could affect cross-border financial linkages (forex markets, trade insurance, equity markets, etc)

Apart from the China factor, some economies also face economic and fiscal strain from natural disasters such El Nino and cyclone. El Nino conditions have worsened drought and lowered agricultural output in many economies, including Nepal and India.

 

The IMF recommends:

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Although the global economic panorama remains turbulent, policymakers in Asia will need to continue to build on the region’s strengths. Harnessing Asia’s potential will call for strong implementation of a wide-raging policy agenda, including enhanced communication of policy frameworks and goals. Structural reforms, aided by fiscal policy, should support economic transitions and bolster potential growth. Monetary policy should remain focused on supporting demand and addressing near-term risks, including from large exchange rate depreciations and deflationary shocks. Policies to manage risks associated with high leverage and financial volatility will play an important role, including exchange rate flexibility, targeted macroprudential policies, and in some cases, capital flow measures. Finally, policy recalibration should not lead to a buildup in vulnerabilities.

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