Financing the 12th FYP programmes will be a challenge according to World Bank’s latest developmental update.  In the 12th Plan period, the government has projected a total financing gap of Nu 29.2 billion.

While domestic revenue mobilisation through tax reforms and rationalisation of expenditures are critical, the rest will be financed through concessional loans, issuance of government bond, treasury bills and increased use of public-private partnerships (PPP).

However, accessing these revenues will require the development of capital markets for government bonds and improved investment climate to attract PPPs.

Current expenditures are projected to increase with higher spending on the maintenance of hydropower plants and increase in public sector wages based on the recommendations of fourth pay commission. The increase in wages has been estimated at Nu 4 -5 billion a year.  Royalties from Mangdechhu project will be used to finance the increased wages.

Besides, the report projected an increase in spending, as the government will carry out new public investment programmes in line with the 12th Plan.  Based on the spending projected in the Plan, capital spending in financial year 2021-22 will be low and there will be a corresponding decline in the grants from India.

As of December 2018, external public debt stood at US dollar 2.5 billion or 103 percent of GDP. The borrowings by state-owned enterprises for hydropower accounted for about 77 percent of external debt.  Nearly 90 percent of hydro external debt is from India with interest rates of nine to ten percent for Punatsangchhu I and II, and Mangdechhu projects.  Further, hydropower construction costs are swelling due to increasing debts.

The delays and cost escalations could affect growth and revenue collection, the report states. However, it states that India will cover both the financial and construction risks related to the hydro projects and buy the surplus electricity at cost plus 15 percent net return. “Therefore, as long as the 15 percent net return is secured, hydropower external debt will remain sustainable.”

Risks

Delays in the completion of hydropower projects in the past few years have had an adverse impact. Although the Mangdechhu project is likely to be operationalised, Punatsangchhu I and II are uncertain due to geological problems. The delays impact the economy through lower growth, exports, and revenues. A year’s delay could negatively affect growth by 3 to 4 percent.

Grant financing as a share of Gross Domestic Product (GDP) declined significantly from 18 percent in 2003 and 2004 to 8 percent in 2016 and 2017. The increase in the size of the economy and graduation from the list of Least Developed Countries suggests that the trend would likely continue.

Bhutan is exposed to hydro-meteorological hazards, which increases the risks on hydropower and other sectors.

Most of the country’s productive infrastructure (hydropower plants, roads, and airports), fertile agricultural land, and over 70 percent of the settlements are located along the main drainage basins, which puts them at high risk of flooding. Variations in timely and quantity of rainfall can cause severe consequences of water availability, agricultural productivity, and food security.

Long-term challenges include the need for diversification of the country’s asset base through investments in physical capital, human capital, and institutions. This would help lower the barriers for investment and facilitate private sector development.

Recommendation

The World Bank recommends broadening financing options: implementation of GST in 2020-21 without delay was critical in mobilising domestic revenue. Developing the capital market will help finance the budget and in developing the financial sector.

With the operationalisation of the Mangdechhu project, exports are projected to increase, while imports remain moderate due to delay in the construction of Punatsangchhu I and II. Also, hydropower production and exports from Tala will also increase with the completion of the maintenance work.

Inflation is likely to reflect price developments in India and the Royal Monetary Authority is taking steps to strengthen its monetary and exchange rate policies. The inflation rate is expected to pick up in the near future with increase in food prices in India and higher fuel prices.

The report states that Bhutan is undergoing rapid urbanisation and a structural transformation to a service-based economy. While population growth and economic activity is concentrated in only a few settlements, the report recommends undertaking different approach to achieve balanced regional development.

Phub Dem