Government’s borrowing capacity enhanced

However, spending judiciously is important

In order to address the country’s financing needs, the government is poised to borrow an additional Nu 35.88 billion (B) as non-hydro debt in the fiscal year 2024-25, based on projected Gross Domestic Product (GDP) figures.

The country’s non-hydro debt reached Nu 94.32B last year, amounting to 34.8% of the estimated GDP. The government’s borrowing limit, as per the Public Debt Management Policy 2023 allows for a non-hydro debt not exceeding 55% of GDP annually. Accordingly, in the fiscal year 2024-25, the government could potentially borrow up to Nu 130.19B. This indicates an additional borrowing capacity of Nu 35.88B, constituting 20.2% of the projected GDP for that year.

One of the most pressing concerns for the government, the non-hydro debt witnessed an upward trajectory over the past three years, surging by 65%. From Nu 57.12B in 2020, it rose to Nu 60.23B in 2021, and further increased to Nu 73.22B in 2022. The government resorts to borrowing to cover budget deficits, attributing these liabilities directly to government expenditures.

In alignment with the ambitious goal of doubling the GDP to USD 5B by 2029, the government aims to achieve an average GDP growth rate of 8% annually. For the 13th FYP, with total resources estimated at Nu 363.91B and projected expenditures at Nu 404.51B, the fiscal balance is anticipated to be around 3% of GDP or Nu 40.6B. The draft 13th FYP outlines a gross financing requirement of Nu 91.19B, with emphasis on prioritizing borrowings from external concessional sources to mitigate financing costs.

According to an official from the Finance Ministry, the government must explore alternative revenue mobilization methods, effectively manage grants, enhance exports, and attract foreign direct investments to mitigate the risk of debt overhang.

“A significant portion of revenue allocated to debt servicing could constrain funds available for public investments and developmental projects,” he alerted.

The country’s public debt as of 2023 stood at Nu 279.93B, comprising Nu 251.83B in external debt and Nu 28.1B in domestic debt. The Public Debt Policy allows for exceeding debt thresholds during economic crises, requiring the government to declare emergencies and inform Parliament sessions of stabilization plans and debt servicing strategies.

Bhutan’s approach to fiscal management, particularly its debt management strategies, is essential for maintaining economic stability and achieving sustainable growth. The country faces unique challenges and opportunities, given its developing economy status and the need to balance economic expansion with environmental and cultural preservation.

According to financial experts, Bhutan must carefully balance its borrowing needs against its development objectives. Borrowing is often necessary to fund infrastructure projects, social programs, and other developmental initiatives that are critical for the country’s progress. However, excessive borrowing can lead to high debt levels that may become unsustainable over time.

“Bhutan should aim to prioritize investments that have high returns in terms of social and economic benefits, diversify funding sources by exploring non-debt-creating inflows such as foreign direct investments and grants, develop a medium-term debt strategy that aligns with its Five-Year Plans, all the while ensuring that borrowing aligns with long-term fiscal goals,” an expert said.

To maintain financial stability, Bhutan must ensure it has effective debt servicing strategies in place. This involves maintaining a manageable debt service ratio, which is the share of revenue that goes towards servicing debt, utilizing fixed interest rates or hedging against interest rate risks to avoid sudden increases in debt servicing costs due to rate fluctuations, and lengthening debt maturities where possible to spread out repayments and reduce annual financial burdens.

Similarly, creating fiscal buffers can safeguard the economy against unforeseen downturns or financial crises. Bhutan could set aside funds during economic upturns to build reserves that can be used in times of need, implement stricter fiscal rules during periods of strong economic growth to restrain over-expansionary fiscal policies.

Economists point out that Bhutan can benefit from the expertise and experience of international financial institutions like the International Monetary Fund (IMF) and the World Bank for technical assistance in areas such as debt management and fiscal policy formulation.

By implementing these strategies, Bhutan can effectively manage its debt, ensuring that borrowing supports its developmental objectives without compromising its fiscal health or economic stability. This balanced approach is crucial for Bhutan as it continues to develop economically while preserving its unique cultural and environmental heritage.

By Tashi Namgyal, Thimphu