Current FY to see increase in fiscal deficit

World Bank predicts the countryโ€™s fiscal deficit to touch 6.1% of GDP in 2023 – 2024

The countryโ€™s fiscal deficit is expected to increase to 6.1% of Gross Domestic Product (GDP) in the Fiscal Year (FY) 2023/2024 due to an increase in current spending following a major salary hike to address significant staff attritions, according to the forecast of the World Bank (WB).

The WB further stated that an increase in tax revenue will be offset by lower hydro profit transfers and external grants and that the capital expenditures are projected to decline as the 12th Five Year Plan (FYP) ended in June 2023 and capital spending is typically lower in the first two years of a new FYP.

โ€œThe fiscal deficit is expected to decline beyond FY 2024/2025, reflecting a moderation in primary recurrent expenditure and increased hydro revenue,โ€ the WB stated.

Similarly, despite a decline in hydro debt in recent years, public debt is projected to remain elevated as a share of GDP in the medium term due to high fiscal deficits and the risks to debt sustainability are expected to remain moderate as the bulk of the debt is linked to hydro project loans from India with low refinancing and exchange rate risks.

For instance, the Current Account Deficit (CAD) is projected to decline to 17% of GDP in FY 2023/2024 due to a large reduction in IT equipment imports, and to moderate further in the medium term, supported by an increase in tourism and electricity exports.

According to the WB, the CAD has remained elevated at 27.8% in FY 2022/2023, due to imports of IT equipment and a slow recovery of tourism. Exports increased, reflecting higher tourism receipts.

While the WB stated that the goods imports are expected to remain high, reflecting the import of crypto mining equipment and elevated commodity prices, where as a result, gross international reserves are expected to decline further from USD 833 million (M) in June 2022 to USD 533M in June 2023, equivalent to 4.3 months of FY 22/23 imports.

The WB projected that the international reserves are expected to increase to 6.2 months of import coverage in FY 2023/2024.

As of the economic outlook, the WB projected real GDP growth rate to decline to 4% in FY 2023/2024.

However, the WB stated that the overall growth is expected to be supported by higher growth in tourism-related services and on the demand side front, the growth is supported by private and public consumption, reflecting higher government spending.

While, as of the WB the public investment is contributing negatively to growth due to a decline in capital spending and the medium-term growth is expected to be supported by a recovery in the non-hydro industry and services sectors, and by the commissioning of a new hydro plant.

Meanwhile, on the recent economic developments front, the WB stated that the economy has grown by 4.6% in FY 2022/2023 with the support of borders re-opening for tourism in September 2022.

Similarly, the industry sector grew by 5.1% in the FY 2022/2023, reflecting a strengthening of construction and manufacturing activities, but and the services sector grew by 5.0%, supported by transport-and trade-related services, resulting in more employment opportunities in the sector, including an increase in hotel and restaurant jobs.

In the FY 2022/2023, the WB stated that tourist arrivals remained below pre-COVID-19 levels because of weaker consumer confidence globally and the new tourism levy act, which tripled the sustainable development fee (SDF) for international tourists. However, the SDF was halved starting in September 2023 to attract more high-end tourists, the WB stated.

Meanwhile, the fiscal deficit narrowed from 7.7% of GDP in FY 2021/2022 to 5.1% in FY 2022/2023 due to higher domestic revenue and lower capital spending with total revenue increased due to higher non-hydro revenue, reflecting the gradual recovery in the industry and services sectors.

By Sherab Dorji, Thimphu