Govt. to adopt an expansionary fiscal stance

The govt. will do this during the FY 2021-22 and FY 2022-23

In order to stimulate economic activities, the government will adopt an expansionary fiscal stance during the FY 2021-22 and FY 2022-23, the last year of the 12th Five Year Plan (FYP), according to the Ministry of Finance’s public debt sustainability analysis report.

The expansionary fiscal stance is expected to boost economic growth, enhance tax revenue and generate employment in the country.

However, one of the biggest fiscal challenges facing the country is increased spending requirements, while the country’s revenue has been falling due to the disruption of economic activities by the Covid-19 pandemic.

For the 13th FYP, which will start from July 2023, the annual average growth rate of government investment has been projected at 12%. It is one of the assumptions for key macro-fiscal indicators. However, the fiscal deficit is expected to remain elevated in the short term.

According to the report, the domestic revenue is also expected to improve significantly during the plan period due to the commissioning of ongoing hydropower projects, an improved collection due to better enforcement, digitization, and fiscal and tax reforms.

In addition, the current account balance of the country is expected to improve significantly in the medium to long-term.

“The 13th FYP is currently at the initial stage of formulation and it is difficult to project the level of capital expenditure in the medium to long-term. Nonetheless, the 13th FYP is expected to support economic recovery,” states the report.

The report also states that the current account surplus is expected to average 0.5% of the GDP in the 13th FYP (2023-2028), in contrast to the average annual deficit of 15.9% of the GDP in the 12th FYP.

“In the long run (2023-2041), the current account surplus is projected to stabilize at an annual average of around 1.75% of the GDP.”

Further, the turnaround in the current account balance in the medium-to-long term would primarily be driven by increased electricity exports to India after the commissioning of four ongoing mega hydropower projects.

According to the report, the electricity exports in the medium-term of the 13th FYP are projected to average Nu 65.77bn per year, compared to the annual average of Nu 23.47bn during the 12th FYP.

On the other hand, imports related to the construction of hydropower projects are expected to drop significantly after the commissioning of the last hydropower project—the Kholongchu Hydropower Project—in October 2025.

Meanwhile, economic activities started to rebound in 2021 as the spread of COVID-19 slowed and containment measures were gradually relaxed. Industrial output grew and trade performance significantly improved due to strong domestic and foreign demand.

With this, the economy is expected to grow by 3.7% with a medium-term outlook of around 5% on average. “The optimistic medium-term economic recovery is based on the assumption of sustained progress in containing the spread of new variants, the rollout of booster vaccines, and robust policy measures,” the report states.

It has also been stated that the growth in the medium and long-term will be mainly driven by the commissioning of ongoing hydropower projects in the next three years and four large hydropower projects are expected to be completed in three years.

The commissioning of these projects will significantly increase the country’s export to India, while also supporting the financing of Bhutan’s forthcoming 13th FYP through increased revenue contribution to the government in the form of royalty and taxes.

In addition, the opening of the country to tourists is also expected to have a significant positive impact on the medium- and long-term economic growth.

Bhutan has achieved unprecedented economic growth during the past four decades, recording an average annual growth of 7.4%. GDP grew from Nu 1.031bn in 1980 to Nu 167.327bn in 2018 as the economic base gradually shifted from primary sector to industry and tertiary sectors.

During the past four decades of growth and progress, the economy also transitioned from an agrarian society to a hydro-based and service-led economy. The share of agriculture to the GDP steeply dropped as the industry sector’s share to the GDP increased.

The economy grew by 5.7% in 2019 compared to 3% in 2018, an increase of 2.7 percentage points. The growth was mainly driven by steady performance in the services sector, higher output in the industry sector, primarily with the commissioning of Mangdechhu Hydropower Project (MHP), and increased government spending.

However, the economic performance in 2020 was significantly impacted by the COVID-19 pandemic, recording an all-time low of -10.08%. The services sector experienced its steepest decline as demand in consumer-driven sectors like retail, accommodation, and transport were affected.

Industries that rely on foreign labor and raw materials led to a decline in industrial output further aggravated by a fall in demand, both international and domestic.

In addition, economic activities are expected to pick up with the successful vaccination program seen as a significant step towards providing herd immunity. A gradual economic recovery is anticipated to be supported by the mass vaccination program, higher capital investment and government consumption, and ongoing fiscal and monetary support. 

Kinley Yonten from Thimphu