Constitutional Mandate at Stake?

Widening fiscal deficit and declining foreign exchange reserves remain key concerns for the government

If foreign reserves continue to decline at the same rate as in 2022, the constitutional mandate to have enough reserves to cover 12 months of essential imports could be compromised. This is an issue that Bhutan as a small and import-dependent economy faces, especially widening fiscal deficit and declining foreign exchange reserves. These are the main financial issues for Bhutan, according to the Asian Development Outlook 2023 that was launched on April 4, 2023.  

However, there is some good news in the near term. Higher hydro-power output is expected to sustain Bhutan’s exports and finances. Additionally, the report states that the expected cessation of large information technology imports by mid-2023 is expected to keep the reserve position from deteriorating at such a rapid clip.

According to Sonam Lhendup, Asian Development Bank’s (ADB), Bhutan Resident Mission Economics Officer, the budget deficit in 2022 widened from 6.2% a year earlier to about 8.8% due to a decline in domestic revenue from 24.9% of GDP in fiscal year 2021 to 20.1% in 2022. Even with the increase in grants to 10.4% of GDP, revenue and grants together amounted to only about 30.5% of GDP. Therefore, the fiscal deficit widened by 2.6%.

He added that the current expenditure declined in 2022 to 18% of GDP from 24.2% in 2021 because the economy’s relief measures provided during the Covid 19 pandemic were scaled back. However, the decline in current expenditure was offset by an increase in capital expenditure, which increased by 25.8% of GDP. On the other hand, the domestic revenue declined sharply from 24.9% to 20.1% in 2022. Domestic credit grew in 2022 by an estimated 13.2% increase, with 18.7% in the private sector.

Meanwhile, the Royal Monetary Authority’s (RMA) provisional figures indicate that the foreign currency reserve position was at USD 797.6 million in October last year, adequate to meet 14.33 months of the country’s essential imports, but down over 37% from USD 1.27 billion in the same month the previous year.

Additionally, the government has revised its foreign currency reserve to meet the country’s essential imports for the next 12 months. The revision followed the Cabinet’s approval of the essential import value of 2017 on February 13, based on recommendations from an independent review committee. The revised essential import value for 2023 is USD 603 million for the normal period and USD 464 million for the critical period.

The Constitution mandates the State to maintain foreign currency reserves to cover at least 12 months of essential imports. The finance ministry has been directed to review and analyze the impact of imposing a moratorium on non-essential items, restricting the issuance of foreign currency for non-essential items, and continuing the moratorium on vehicle importation.

 To save dwindling reserves, the government banned vehicle imports, except for utility vehicles, heavy earth-moving machines, and agriculture machinery in August last year. Bhutan is an import-dependent country, and surging import bills erode its foreign currency reserves.

The ADB report says it is vital that Bhutan continues to implement its medium-term strategy for debt management and the latest International Monetary Fund Article IV recommendations to reduce its debt. These include gradual fiscal consolidation, revenue mobilization, normalization of an accommodative monetary policy introduced in response to COVID-19, and addressing risks to banks, especially from a possible rise in nonperforming loans when pandemic relief measures expire.

Meanwhile, the current account deficit widened considerably from the equivalent of 21.9% of GDP in 2021 to an estimated 34.3%. The trade deficit grew as imports increased by 35.2% from a year earlier, largely because of price rises for fuel and steel and a dramatic rise in the imports of information technology equipment, while exports increased by only 2.4%. The current account deficit was financed by a large net financial account inflow, including errors and omissions, and by drawing down gross foreign exchange reserves by USD 215.0 million.

Tshering Pelden from Thimphu