The government’s efforts to frontload the 12th Plan activities amid a dip in the domestic revenue are expected to aggravate the public debt situation which is already high.
Public debt projected for the fiscal year 2020-21 is 126.5 percent of GDP, an increase of 8.4 percent from the previous year, according to a report on Bhutan’s preparation on transition from the Least Developed Countries category submitted recently to the UN’s Committee for Development Policy.
Public debt increased rapidly from 61 percent of GDP in 2010 to an estimated 121 percent in 2020.
The report states that the projected increase is mainly on account of the borrowings from the domestic market through issuance of T-bills and government bonds to meet the resource gap, and loan disbursements for the Kholongchu hydropower project.
One of the reasons for the increasing debt is the fiscal deficit. The domestic revenue is estimated to fall by 14 percent in 2020.
The 12th Plan had set a target to maintain the average fiscal deficit below 3 percent of GDP and to fund at least 80 percent of the Plan expenditure through domestic revenue.
Achieving this target looks increasingly uncertain in the light of the elevated expenditure requirements linked to Covid-19 mitigation and recovery and the pressure on non-hydro revenue sources.
Falling revenues due to the Covid-19 pandemic are expected to widen the fiscal gap in the fiscal year 2020-21 to about 8.4 percent of GDP, likely necessitating recourse to borrowing on foreign markets, should access to grant funding be diminished by Covid-19 impacts on donor countries.
However, most of this debt is directly linked to the hydropower construction projects, where the credit is secured against long-term power purchase agreements. “The external debt is, therefore, unlikely to lead to a debt crisis,” the report states.
The government says that a strong US dollar would make external borrowings more meaningful as the government would receive more when converted into the ngultrum.
But the depreciation of the ngultrum against the US dollar is also expected to aggravate the public debt situation. The local currency suffered 5.19 percent depreciation against the US dollar in 2020.
However, Foreign Minister Dr Tandi Dorji said that the government would not borrow funds for Covid-19 purposes.
He said that the public debt figures were already high even before the Covid-19 pandemic. “The loans we’ve taken are for development purposes,” he said.
Parliament ratified the European Investment Bank framework agreement in the winter session last year, which will allow Bhutan to borrow from the bank.
As of December last year, Nu 31.07 billion (B), which is around 49 percent of the total commitments made by development partners (Nu 63B), was received.
Besides external grant, the government received loans from the World Bank and Asian Development Bank (ADB) for the pandemic response programmes. They were in addition to the regular country partnership assistance.
On the support received for Covid-19 pandemic measures, external assistance received from development partners have substantially capacitated Bhutan in handling and managing the pandemic thereby also helping in the implementation of the 12th Plan.
According to Debt Report 2021 published by the World Bank Group, Bhutan owed 74 percent of its external public debt to bilateral creditors.
In South Asia, the World Bank report states Bhutan had both the highest debt- to-export and debt-to-Gross National Income (GNI) ratio at the end of 2019, 330 percent and 117 percent, respectively.