Fiscal deficit stood at Nu 11.2B in FY 2022-2023

Fiscal deficit stood at Nu 11.2B in FY 2022-2023

According to the central bank, Bhutan has continued to remain a debtor to the Rest of the World (RoW)

The fiscal deficit for the fiscal year (FY) 2022-2023 stood at Nu 11.22 billion (B) accounting for 4.6% of the gross domestic product (GDP). According to the Royal Monetary Authority (RMA), the government resorted net external borrowing of Nu 3.07B and net domestic borrowings of negative Nu 2.89B to finance the fiscal deficit.

The external borrowings were availed from bilateral and multilateral development partners while internal borrowing was raised through issuance of short-term T-bills and long-term government bonds in the domestic market.

For instance, the total public debt for the FY 2022-2023 has increased to Nu 276.97B (114.4 % of GDP) from Nu 256.87B (118.8% of GDP) in the previous year. Of the total public debt stock, external debt comprises of Nu 244.18B and the domestic debt of Nu 32.79B.

The external debt largely corresponds to the hydro related debt (69.1%) which stood at Nu 168.64B and the remaining non-hydropower debt (30.9%) at Nu 75.53B, according to the central bank’s latest annual report 2023.

The hydro debt comprises the debt stock of six hydropower projects of Mangdechhu Hydropower Plant (MHP), Punatsangchhu Hydroelectric Project Authority (PHPA I and II), Tangsibji Hydro Energy Limited (THEL), Dagachhu Hydropower Corporation Limited (DHCL) and Basochhu Hydropower Plant (BHP).

Of the total external debt, the Indian Rupee (INR) denominated debt stood at Nu 160.15B (65.6%) and Convertible Currency (CC) debt stood at Nu 84.03B, accounting for 34.4% of total external debt.

The total domestic debt stock for the FY 2022-2023 stood at Nu 32.79B, which translated to 13.5% of GDP and 11.8% of total public debt stock.

The domestic debt stock largely comprises of the T-bills and government bonds issued for cash management, financing resource gap and to facilitate timely release of funds to implement the externally funded projects.

According to the central bank, the current external borrowings are mainly for the investment purposes in the country that has the potential to generate revenues in foreseeable future.

As of June 2023, the total outstanding external debt stock accounts to Nu 263.60B, constituting 108.5% of GDP where the debt stock increased by 6.7% from Nu 246.94B in light of 13% rise in CC loans at Nu 86.26B.

The main driver of accumulation of external debt stock is attributed mainly due to the rupee debt (66.9%) as a self-liquidating hydropower projects debt while the remaining are non-hydropower which are incurred to meet balance of payments (BoP) obligations with India. The remaining external debt stock was constituted by the CC debt, of which 97.7% is public debt and 2.3% is the private sector loan.

Meanwhile, according to the central bank, Bhutan has continued to remain a debtor to the Rest of the World (RoW) where the net International Investment Position (IIP) stood at a negative USD 3.9B in FY 2022-2023.

Similarly, the country’s external financial claims have decreased by 28.2% to USD 706.4 million (M) in consequences of a drop in the reserve assets from USD 803.8M to USD 553.8M. Trade credit and other assets also recorded a notable dip leading to further drop in total external financial claims.

With a decrease in external financial claims and increase in financial liabilities of the country with the RoW, the net IIP continues to remain negative at USD 3.9B with the external financial liabilities increased by 4.25 from USD 4.6B owing to an increase in external debt liabilities related to foreign direct investment (FDI).

Given the current uncertainties in the global economic environment, the country’s economy is anticipated to remain highly vulnerable to external shocks. The primary challenges revolve around trade imbalances, inflationary pressures and the depreciation of the Ngultrum against the USD.

However, in response to these challenges, the RMA is actively monitoring and taking measures to stimulate the economy while ensuring financial stability through the careful moderation of credit flow in the economy.

In addition, the government maintained a sustainable fiscal balance in FY 2022-2023 with the total outlay of Nu 69.15B for the fiscal year, 51.2% was allocated to current expenditure, with the remaining dedicated to capital expenditure.

According to the central bank, the trajectory of fiscal policy is expected to be influenced by the challenges of debt overhang and contingent liabilities over the medium term.

The borrowings earmarked for hydropower construction and addressing external imbalances are anticipated to contribute to the rise in public debt. Consequently, the fiscal balance as a percentage of the GDP is projected to deteriorate to negative 5.6% in FY 2023-2024, compared to negative 4.6% in FY 2022-2023, according to the central bank.

Meanwhile, persistent borrowings from domestic markets to meet rising fiscal deficits would lead to higher fiscal vulnerabilities and crowding of credit for the private sector growth.

“A persistent trade deficit continues to pose challenges to Bhutan’s external sector,” the central bank stated, however, the RMA stated that a positive outlook is projected for the medium term, with the trade deficit expected to improve from 24.3% of GDP to 20.2% of GDP in FY 2023-2024.

The improvement is associated to the commissioning of two new hydropower projects, coupled with anticipated growth in tourism and inward remittances.

Additionally, positive capital and financial net flows, comprising of official grants, hydro-related, and concessional loans, are expected to increase by 5.2% in FY 2023-2024, which will be adequate to finance the current account deficit over the medium term.

Sherab Dorji from Thimphu