Growing pains

Although a sign of an achievement, Graduating from a LDC status comes with a heavy price

Aid: The direct financial implications of Bhutan’s graduation from a least developed country (LDC) status will be a loss of 26 percent of the Official Development Assistance (ODA), including those of the UN system.

However, if the government of India’s assistance was included, only about nine percent of Bhutan’s total aid would be at risk.

But this should not make the country press the panic button, going by what the finance minister, Namgay Dorji, said.  The minister said this was bound to happen, and that graduation from LDC is the ultimate solution to self-reliance. “How long can the country depend on aid?” he said.

While there are concerns on declining grant and increasing loan portion from the development partners in some quarters during the transition phase of the graduation, the finance minister said the government would prioritise activities.

The current expenditure, he said, would come down as a portion of total budget. “There’ll be a time when all infrastructures are already in place and a day will come when we don’t need five year plans,” he said.  For instance roads, schools and hospitals would have been already built.

 

loanAs for the current expenditure, the Constitution mandates that it should be met from domestic revenue.

The capital expenditure in the first year of the 11th Plan was 16 percent of the total budget or Nu 16.9B.  The following year it was 18 percent, and this fiscal year, 24 percent of the total budget was earmarked for capital expenditure.  In the next fiscal year, the finance minister said it would decrease to about 20 percent.

A local economist said that the commissioning of three on-going hydropower projects coincides with the year of graduation.  This will enhance the country’s revenue and keep the government cash flow afloat, despite the loss of ODAs and grants. “But should any uncertainty prevail in these projects, it would have a serious impact,” he said.

However, in an e-mail interview with the former US ambassador to the Asian Development Bank and a long time visitor to Bhutan, Curtis S Chin, said, mega hydropower projects do very little to create direct employment.

“A critical question for Bhutan is how have past mega hydropower projects created jobs for Bhutanese people, versus simply providing added budget for government salaries and for servicing loans alone.”

While Bhutan should look at ‘graduation’ from the LDC group as an opportunity to move from reliance on donors to greater self-reliance, Bhutan’s policy makers should make the domestic changes necessary to build a stronger, more confident nation, instead of seeking to make the case for more grants and concessional financing from foreign donors and development banks.

The true constraints to growth, Curtis S Chin said, are bureaucracy, regulation, interventionism and corruption (BRIC), which the country should address.

During the 12th round table meeting, the Committee for Development Policy (CDP) of the United Nations recommended Bhutan’s graduation phase from LDC in 2018 to 2021.

To do so, the country has to fulfil two of the three indicators of Gross National Income (GNI) per capita, Human Asset Index (HAI) and Economic Vulnerability Index (EVI). Bhutan has already achieved the GNI threshold.

In terms of economic vulnerability, as a small economy, a UN report stated that the country was confronted with a “narrow economic base” and “high dependency on external trade”

With more than 40 percent of the country’s export being hydropower, Bhutan is more exposed to ‘trade shocks’ and its second major export, metal-based products, was also highly dependent on cheap electricity.  Natural disasters and climate change, the report states, posed greater threat on the country’s economy. “It’s unlikely, therefore, that Bhutan will meet the EVI graduation threshold for some time.”

Going by past budget reports, the country in 2010-11 received Nu 2.6B grant from other donors and Nu 7.8B from India.  However, the figures on loan from the central bank revealed that, during the same year, convertible currency loan amounted to USD 527M (about Nu 34.2B), while the INR loan also amounted Rs 34B.

Since then, grant from other donors more or less stagnated between Nu 3.1B and Nu 3.9B.  The GoI grant was highest this fiscal year with Rs 11.2B and in 2013-14 with Rs 10.6B.

However, the INR loan, including the hydro loans, has increased between Rs 6B to Rs 16B annually, while the convertible currency loan only increased by Nu 3B and declined by the same amount in the last fiscal year.

Almost 63 percent of INR loan on an average accounts for the total public debt, which in turn is on account of hydropower projects.

Curtis S Chin said Bhutan’s growth should not be built on unsustainable debt levels or reliance on its neighbours.

Juxtaposing this, the government claims that hydropower is the best investment because of the self-liquidating nature of the loan. “SMEs not more mega hydropower projects that have been built on public debt will be the real drivers of Bhutan’s sustained economic growth,” he said.

The government, meanwhile, has come up with a debt management policy to curtail the non-hydro debt.

Tshering Dorji

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