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The main objective of the second government bond issuance was to raise finance to capitalize the National CSI Development Bank

The Ministry of Finance (MoF) issued bond for two times from last year to as of now.

The government issued bond worth Nu 700mn for ten years tenure and floated for the second time this year in January. The first one was issued in September 2020 where Nu 3,000mn for three years tenure bond with an annual coupon rate of 6.5% in the name of government was offered for public subscription through the Royal Monetary Authority (RMA).

A MoFโ€™s official said the main objective of the second government bond issuance was to raise finance to capitalize the National CSI Development Bank. The whole proceed of the bond was injected as an equity by the government to the bank.

The official said that the CSI sector is recognized as one of the potential sectors to enhance domestic production, generate income for rural people, and create employment opportunities in the country.

The National CSI Development Bank was established in 2020 with the core mandate to extend credit to CSI sector and small businesses engaged in trading domestically-produced goods.

โ€œTherefore, the Nu 700mn fund will enable the NCSIB to lend to the CSI sector and small business in the country, helping small and medium enterprises in the country to have easy access to finance. This in turn is expected to enhance domestic production, create employment opportunities and generate income for rural people, thus revitalizing our economy that has been devastated by the COVID-19 pandemic,โ€ the official said.

When asked about how this bond enables the government in meeting the capital budget deficits, the ministry responded that to finance budget deficit, the governmentโ€™s current financing strategy is to first source the financing from external concessional windows, such as ADB and World Bank.

The official mentioned that if the financing from external concessional windows is not adequate, then the government would raise the financing from the domestic market, through issuance of Treasury Bills (T-Bills) and Bonds, which are conventional, popular method of raising finance by the governments in most countries around the world.

Besides raising financing for the government, the regular issuance of government securities facilitates the development of an efficient domestic capital market, which is critical for an efficient allocation of resources in the economy. Thus, one of the objectives of issuing bond by the government is to facilitate development of the domestic capital market.

For Nu 3,000mn bond issued last year, the tenure was only for three years and now for Nu 700mn the tenure is for 10 years.

The ministry mentioned that the reason for that is there are different types of investor in the market, with varying investment requirements. Thus, it is imperative that the government issues varying maturity bonds to encourage a broad-based ownership of the government bond. Thus, the government introduced longer maturity bond for the second time to provide opportunity to investors with long term investment need to finance the specific goals.

The two consecutive issuances of bonds have also created worry among the public that the government is running out of capital resources.  However, the ministry mentioned that although they have fiscal constraints this year due to drastic drop in tax revenue, the two successive bond issuances were not for financing capital expenditures but to meet specific requirements.

According to the Public Finance Act 2007 and amendment thereof provides the government the authority to raise loans, through the following sections in the act.

The Section 15 states the finance ministry will have the powers necessary to fulfill its responsibilities under this Act. Such powers include approval of borrowings and issuance of public securities subject to concurrence of the Lhengye Zhungtshog.

Section 125 states that the Minister of Finance may raise a loan from any person, organization, or government, either within or outside Bhutan.

Section 126 states that the Minister of Finance may borrow money to finance budget deficits; to refinance maturing debt or a loan paid before the redemption date; to maintain credit balances in the bank accounts and on-lending to state enterprise and other legal entities and any other purpose approved by the Lhengye Zhungtshog.

Section 127 states that the authority of the Minister of Finance to raise loans under Section 125 will include the authority to borrow money by way of the issue of public securities such as bills, bonds or commercial paper.

The primary issuance of government bond is governed by rules and regulation for issuance of government bond 2020.

The taxation on interest income as per the Income Tax Act of Kingdom of Bhutan 2001, the interest income is taxable income for the BIT and CIT paying entities. Thus, except for those entities under a tax holiday, the half-yearly coupons will be paid net of 5% TDS.

Interest income from government bond is not a taxable income for PIT purposes. Thus, half yearly coupons will be paid in full to individual investors.

Recently, the government also floated T-bills worth Nu 6bn. The bills will be auctioned under multi-price method and issued through the RMA, which means lowest bidders will be allowed full subscription followed by the second lowest bidder.

The objective of the T-bill is primarily intended to finance temporary shortfalls in government revenue. The introduction of T-bills is an integral element in the countryโ€™s process of liberalizing interest rates and development of domestic debt and money market.

Dechen Dolkar from Thimphu