MB Subba

The country’s fiscal deficit has widened to 7.36 percent of Gross Domestic Product (GDP), mainly because of the government’s fiscal policy to ramp up spending to offset the impact of Covid-19 and unprecedented decrease in the domestic revenue.

The fiscal deficit, which is estimated at Nu 15.329 billion (B), signifies the gap between the government’s revenue and expenditure. This is much higher than the average fiscal deficits of developing countries, which range between 3 to 5 percent of GDP, according to finance ministry officials.

Bhutan’s fiscal deficit in the past three years hovered around 2 to 3 percent.

An increase in the fiscal deficit due to increased public investments can boost an economy through consumption and private investments. But the fiscal gap, which is closed by government borrowings, can also be detrimental to the economy in terms of public debts, inflation and foreign currency reserves, among others.

One of the key objectives of the 12th Plan is self-sufficiency. But the domestic revenue decreased by almost 50 percent to Nu 17B in the fiscal year 2020-21 from Nu 36B in the previous fiscal year, according to figures with the finance ministry.

The government’s revenue also depends on the performance of state-owned enterprises (SoEs), which is estimated to fall by 9 percent in 2021. SoE’s in 2020 contributed a total of Nu 8.5B, which was 20 percent of the total revenue.

On the other hand, the total government’s expenditure surged by an estimated 28.9 percent to 32 percent of GDP on account of a higher current expenditure during the same period, according Asian Development Outlook (ADO) 2021.

The 12th Plan’s average fiscal deficit to GDP ratio was 3 percent. But with the Covid-19 situation, finance ministry officials estimate that the average 12th Plan ratio would hover around 4.2 percent.

The government has ramped up spending by allocating more than Nu 36.2B (44 percent of the total budget) in the ongoing fiscal year, which will end on June 30. The government plans to increase the budget in the fiscal year 2021-22.

The government will spend about Nu 38B in the new fiscal year that will begin from July 1, according to the finance ministry. An increased spending increases not only fiscal deficit but also public debts.

The overall public debt today has reached 120 percent of GDP from 87 percent at the end of the 11th Plan. Most of the debts, which are on hydro projects, are self-financing.

However, non-hydro debts had increased to 29 percent of GDP from 25 percent (Nu 47.842B) in March this year. The 12th Plan target was to maintain non-hydro debts, which are borrowed to finance programmed activities, at 15.9 percent of GDP.

The government, however, says that the loans are concessional. The loans from Asian Development Bank (ADB) are availed at a 1.5 percent interest rate.

The finance ministry estimates debt to increase to 130 percent of GDP in the coming year on account of disbursements for hydropower projects, including Kholongchhu.

The government has not initiated new hydropower projects. But further delays in hydropower projects are expected to escalate costs in the form of public debts.

Finance Secretary Nim Dorji at a recently concluded midterm review said that the debt to GDP ratio is an indicator of economic stability and that 50 to 60 percent would be normal. He said that non-hydro debts were controllable unlike hydro debts that depend on the total cost of the project.

Citing examples, he said that the debt to GDP ratios of Japan and the US were 220 percent and 106 percent respectively. He added that the stock of their public debts was in local currencies but that most of Bhutan’s debt stocks were in foreign currencies.

Nim Dorji said that it will take “some time” for revival of industries and that a drastic improvement in fiscal sustainability hinges on how soon Punatsangchhu I would be commissioned. The commissioning of the 1,200 MW run-of-the river project has been deferred to 2024.

Another impact of increased public spending, according to economists, would be inflation in the market, as the measure would increase money in the hands of consumers. The overall inflation in the ongoing fiscal year is expected to average at 6.4 percent but food prices are expected to increase by 15.2 percent, according to ADO 2021.

The increased spending could deplete the foreign currency reserve if import restrictions are eased. Public spending in Bhutan normally fuels import of equipment and construction materials.

The foreign currency, according to the finance ministry was Nu 1.5B as of March 31, of which Nu 1.1B was in convertible currency and Nu 24.6 million (M) in INR. The Constitution mandates that a minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained. 

According to the finance ministry, the current reserve would last for more than 20 months although the country needs to maintain Nu 663M as international reserve for import of essential items.

But he added that the level of foreign currency requirement for import of essential items needed to be updated/revised annually given the changes in prices and the changing nature of what essential items consist of. Essential items today include food items, industrial raw materials, fuel, medical supplies and education services.

In an interaction with Kuensel, the Delhi-based regional economic advisor of ADB, Lei Lei Song, said that it was an extraordinary situation in which the public sector needed to step in to support the economy from deteriorating further.

“As the fiscal deficit increases, the government has to borrow and that will increase the debt. But this is the only way the government can support the economy in this situation,” the ADB’s economic advisor said.

Lei Lei Song said that the situation would improve drastically when the Punatshangchhu I is commissioned.