Bhutan’s fiscal deficit estimated at 9% of the GDP

Government spending continues to accelerate economic recovery

The country’s fiscal deficit is projected at 9% in this financial year, as government spending continues to accelerate economic recovery.

This is according to the ministry of finance’s macroeconomic situation report. A fiscal deficit is a gap between the government’s total revenue and total expenditure which needs to be filled with borrowings. Fiscal deficit arises when government spending exceeds its revenue.

The report states that the total expenditure is estimated to increase by 8% with a capital budget of Nu 38.5bn, which is one of the highest, constituting 51.5% of the total outlay.

However, the finance ministry estimated total resources of Nu 56.1bn as of December end 2022 in its fourth-quarter macro-economic situation report.

With this, the domestic revenue will be revised from an estimated Nu 36.4bn to Nu 41.3bn, including royalty from the tourism industry and broad-based improvement in the collection from both direct and indirect taxes.

The increase in the fiscal deficit has also been attributed to the Covid-19 pandemic. However, the fiscal deficit has increased despite austerity measures.

In terms of grant mobilization, the residual amount of the 12th FYP amounting to Nu14.8bn is estimated to be received in the current financial year.

However, the fiscal deficit remain elevated as resource mobilization was lower compared to increased spending requirements related to the COVID-19 pandemic. For the financial year 2021-22, total expenditure increased by 16.4%, while total revenue mobilized reduced by 12.7% translating to a fiscal deficit of 8.9% of GDP.

The increase in spending was primarily driven by capital expenditure reflecting a targeted scale-up in public infrastructure projects to support the economic revival. Capital expenditure is estimated to have increased by 25.2% while recurrent expenditure was maintained within the domestic revenue.

In the previous financial year, with the resources side, domestic revenue exhibited a growth of 8.9% due to an increase in tax revenue by 25.1% mainly stemming from the improved collection in CIT, BIT, PIT, sales tax, and green tax. While grants remained on a lower end with a receipt of 61.7% only compared to the budgeted amount.

According to the ministry of finance, the total public debt is estimated to increase although the overall risk is deemed manageable as the risk of debt distress is considered moderate.

As the major portion of external debt is in hydropower projects, which are commercially viable and deemed self-liquidating, an increase in debt ratio may not be a cause of concern.

For the financial year 2021-22, total public debt stock stood at Nu 257.6bn, accounting for 132.9% of GDP, of which external debt stock comprised Nu 229.6bn.

While the domestic debt stock stood at Nu 28.1bn, an increase of 64.4% due to the issuance of government bonds of Nu 8.5bn.

However, for the financial year 2022-23, total public debt stock is estimated to increase to Nu. 263.2bn, which contributes 128% of the GDP and to Nu 318.8bn in the financial year 2023-24 accounting for 144.2% of GDP mainly on account of PHPA II disbursements and inclusion of upcoming new small hydropower projects.

Non-hydro debt is also projected to increase over the medium-term as concessional borrowings would be undertaken to meet the fiscal deficit.

Kinley Yonten from Thimphu