Policy: Bhutan’s annual debt service obligations of total external debt will not exceed 25 percent of total exports of goods and services, according to the new public debt policy launched yesterday.

The thresholds for non-hydro power debt stock is fixed at 35 percent of gross domestic product (GDP) during the Five Year Plan period, while the general government debt should be less than 22 percent of domestic revenue in any given financial year.

The policy stipulates that short-term external debt, including debt contracted by the Royal Monetary Authority shall not exceed 30 percent of surplus reserves in any given financial year. Sovereign guarantee issuance for public corporation borrowing is limited to five percent of the country’s GDP each year.

The thresholds can be breached only in times of economic crisis and other times when the government has no means to raise additional debt to maintain socio-economic stability. It will have three years to stabilise the economy under such conditions.

The hydropower related external debt has to maintain a ratio of debt service to hydropower export revenue of less than 40 percent. The debt to equity ratio of hydropower projects cannot exceed 70:30.

The thresholds are to reduce the undue debt burden that might arise from indiscriminate borrowing for social projects, which do not necessarily generate financial returns. Other considerations are aimed at ensuring fiscal discipline and avoiding ad-hoc, short-term borrowing which are generally costly.

The recent economic growth was coupled with increasing public debt, comprising largely of external debt for hydropower development.

If the country continues with similar growth rates, it is expected to graduate to a middle-income country status in the next decade. If so, Bhutan will not be eligible to avail low-cost finance that has fuelled growth till date.

With the increased GDP per capita, the present concessionary lending terms offered by the multilateral agencies are expected to change. This will mean that the government will have to seek new sources of finance for its capital expenditures. In view of the dwindling grants, external borrowing is expected to increase hereafter.

The absence of a clear policy guideline on public debt management and borrowing poses risks due to unsustainable borrowings. From this perspective, a prudent debt management policy assumes high importance.

Finance minister Namgay Dorji said that a well-articulated debt management policy will help to ensure that the government’s financing needs and that debt obligations are met at the lowest possible cost with a prudent degree of risk.

“The policy leaves no opportunity in future to avail excessive borrowings, harming the long-term interests of the nation to meet their short-term party pledges,” he said.

Effective debt management will be of paramount importantance in ensuring that debt financing is sustainable and contributes to the economic growth of the country, and ultimately in achieving the overarching development objective of Gross National Happiness, the minister said.

The public debt policy provides a broad framework to guide decisions that will ensure sustainable debt levels and efficient portfolio management.

It extends to all public and publicly guaranteed external and domestic debt of Bhutan. However, given the nascent stage of development of the domestic debt market, the thresholds in this policy shall apply only to external debt, until such time the thresholds for domestic debt can be determined to compliment this policy.

“This policy will enable the government to proactively guide its investment plans and ensure that financing decisions are prudent and public debt is maintained at a sustainable level,” Lyonpo Namgay Dorji said.

The debt management division of the finance ministry will be upgraded to a department. Until then a public debt advisory committee will be formed.

The policy is governed by the Constitution, the Public Finance Act of Bhutan 2007, the Audit Act of Bhutan 2006 and the Royal Monetary Authority of Bhutan Act 2010, and amendments thereof.

The Cabinet approved the policy, formulated by a committee from the National Statistical Bureau, Gross National Happiness Commission, finance ministry, Royal Monetary Authority, and hydropower and power systems department, in the past two years, in its 109th session on August 2 this year. The policy is effective from August 18.

Tshering Palden