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Notwithstanding the country’s rising external debt, the government is contemplating on revisiting the debt cap fixed by the former government, who introduced the public debt management policy.

As of June this year the debt to GDP ratio has touched 114 percent.

International institutions such as the World Bank and IMF, however, claim that the risk is modest because a major chunk of country’s debt is equity driven, meaning the hydropower debt. What we must understand is that  revenue from hydropower will service its debt and the buyer, India, has contractual obligation to buy electricity. Cushion is there. In other words, the country’s debt sustainability is bet on the commercial sustainability of hydropower projects.

However, we must take a second look at the size of the cushion and the amount of force it can resist.

Cost and time overrun and teething problems have put the hydropower sector into quagmire. Problems such as this are heaping interest and principal payment, let alone account the revenue foregone. The Indian Ambassador to Bhutan said that there is nothing that the two countries cannot put on the table. But common sense hints that losses both financially and morally will not be acceptable to both sides.

Coming to the non-hydro debt, according to the Prime Minister, is the best chance for Bhutan to gather subordinated debt due its LDC status.

UN announced Bhutan’s LDC graduation without fulfilling the economic vulnerability index, which is in keeping with graduation criteria. Technically, the UN believes that shedding the LDC tag would not affect Bhutan’s economic vulnerability since the country doesn’t lose much. And as it is, there are only a handful of funding instruments, Bhutan accessed through its LDC tag. It is the bilateral arrangement, such as with the GoI, that are substantial but not associated with the LDC status.

The Prime Minister said the country must explore cheapest funding opportunities when it is eligible for cheap loans. But the sustainability of such financing will depend on where the government choose to invest. It has to make economic sense and importantly, from where it source the repayment. It should not come at the cost of taxpayers.

What we have seen from the hydropower, for instance,  is that the civil servants have gained the most either from commissioning of new projects or a hike in export tariff. Since the onset of democracy, 100 percent or more of the additional revenue from hydropower was consumed in civil servants’ pay hike.

While Bhutan should carefully monitor its public debt, ensuring 15 percent net return (current practice) is critical throughout the negotiation process.

Non-hydro debt has to be used for productive purposes such as infrastructure and investment in health and education. For instance, a billion ngultrum debt on financing the Moa Khola bridge should outdo the political promises over economic returns.

This doesn’t mean that government should limit financing for development. Non-debt financing such as foreign direct investment (FDI) and remittances would ensure stable financing and warrant a lesser reliance on debt. Enhancing the capacity of local banks is a big move in the long run.

While debt has been a key issue, politically as well as economically, it is not the time to divide the national debt among the citizens but to help the country strengthen its fiscal and monetary policies.

After all, debt is debt.

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