Policy: The country’s non-hydro debt ceiling will not exceed 35 percent of the Gross Domestic Product (GDP) and financing modality of upcoming hydropower projects will not cross the 70:30 debt to equity ratio.

This will be ensured by a public debt policy, the draft of which received the green signal from the Cabinet and is with the Gross National Happiness Commission.

The draft policy prescribes that the government debt service shall not exceed 22 percent of the domestic revenue in any given fiscal year, meaning that government cannot use more than 22 percent of domestic revenue for debt repayment.

Short-term external debt, including those contracted by the central bank is also capped at 10 percent of surplus reserves and sovereign guarantee issued by the government will not exceed 5 percent of GDP.

Sovereign guarantee is a government’s guarantee that debt obligation will be satisfied if the primary obligators, usually the public companies, defaults.

For hydro-loan, the draft debt policy states that ratio of debt service to hydro export revenue will be contained within 40 percent. This means that hydro debt repayment in any given year will not exceed 40 percent of the export revenue. For example, if export earning from hydropower is Nu 10B for a year, then the debt repayment shall not exceed Nu 4B.

The debt service coverage ratio (DCSR) or the index of export earnings needed to meet annual interest and principal payments on a country’s external debts, for a hydropower project would also be maintained at 1.2. A DSCR of less than 1 would mean a negative cash flow and positive, if its more than one. A DSCR of less than 1, say .95, would mean that the operating income of a project can cover 95 percent of annual debt payments.

While the policy is still in its draft phase, finance minister Namgay Dorji said the ceiling was very critical for the country. “There is a danger of political parties taking so much loan to fulfil their pledges,” he said.

As for the hydro debt, he said besides some threshold on various ratios it was not advisable to put a generic cap since most projects are already half way through. However, he said debt ceiling on hydro-loan would feature as a part of hydropower policy that would be reviewed soon.

Although it has been not worked out as to how much is the borrowing capacity of the country, Lyonpo Namgay Dorji said the government has the capacity to borrow more than the ceiling if required.

“Through the issuance of an emergency decree, the government may review the thresholds during times of economic crisis and other unforeseen exigencies and extraordinary circumstance to maintain socio-economic stability and stimulate the economy,” the draft policy states.

Currently, the non-hydro debt stands at 26 percent of the GDP. It has once reached  almost 50 percent of GDP in the last planned period.

Figures from the Royal Monetary Authority reveals that country’s total outstanding loan as of March stood at USD 1.8B, of which 74 percent (Rs 78B) was INR denominated. The debt to GDP ratio was about 109 percent.

Government & SOEs

The draft policy also imposes conditions on the government to borrow.

For instance, the government can raise loan for development priorities only after fully exhausting the grant and that the borrowings from concessional windows must be prioritized over other alternatives.

Commercial borrowing should be made only for the purpose of investment in financially viable sectors, besides ensuring that capital mobilization from domestic market does not crowd out the private sector.

Although some of the conditions were followed in practice earlier, officials said it was never there on paper.

State owned companies can borrow only after approval from the finance minister, as their borrowings constitutes a part of country’s total public debt. Thus the draft policy also places some conditions on these companies. The finance minister said that the ministry would study the debt requirement of the SOEs and simultaneously study its impact on the ceiling.

“Due diligence and proper risk analysis of the investment proposals would be carried out before approval,” Lyonpo Namgay Dorji said.

The SOEs, as per the draft policy cannot borrow to meet recurrent expenditure and must ensure adequate return on investments.

Where direct borrowings by SOEs from external sources are difficult, the government would be borrowing for the companies under a separate subsidiary agreement. However, lending from the government would be only for socially beneficial projects or for carrying out development activities.

Institutional arrangement

The current Debt Management Division would be upgraded to Department of Public Debt Management to ensure the efficiency and consistency in implementation of the policy besides assuming all functions of debt management.

For decision making regarding the debt management, the draft states that, two-tiered approach would be followed.

While the final authority to approve all decisions lies with the finance minister and the Cabinet, a high-level debt advisory committee would provide recommendations and advice to the government.

This high-level committee should however base their recommendations on the technical inputs from the Department of Public Debt Management.

The minister said that in the interim, until the division is upgraded to a full-fledged department, a public debt committee would be formed to work with the division.

By Tshering Dorji