Revenue deficit & public sector monopoly, major economic challenges: WB

In the short to medium term, large macroeconomics imbalances which translate into twin deficit- a large fiscal gap and a large current account deficit, and public sector being preferred employer are two major government economic challenges, according to the Public Financial Management Performances Report by World Bank.

Bhutan’s large current account deficit stands at about 26% of Gross Domestic Product (GDP). According to the report, this external deficit is reflected in the financing by the domestic revenues of only 65% of the government spending; the rest is financed by donor resources.

Tax collection is as low as 13% of GDP and the rate has been declining. “Given that Bhutan is a small country with an exchange rate pegged to India’s rupee, its fiscal policy will play a pre-eminent role in reducing this twin deficit by increasing the revenue effort, enhancing the efficiency of public spending and managing debt sustainably,” the report states.

In terms of percentage to GDP, the domestic revenue is expected to be about 17% of the GDP at the end of 11th Five Year Plan (FYP) (FY2017-18). Since hydropower is the main source of revenue, with expected commissioning of new mega hydropower projects in the FY 2017-18, major increase in the revenue is expected the year.

In the 11th FYP, the government’s main strategic thrust areas to achieve outcome was on inclusive social development such as poverty reduction, developing health and education sectors, accelerated green economic development and strategic infrastructure development.

Total public debt is projected to increase to 111% of GDP in FY 2017-18. Hydropower debt constitutes a major part of the public debt, which is expected to be about 90% of GDP in FY 2017-18. However, according to the report it is not a major concern as the hydropower sector generates adequate revenue through export proceeds to service its debt.

While the public sector is the preferred employer, according to the report, private sector development will be necessary for sustainable growth and job creation. “The government’s ability to absorb the new, young workers entering the labor market each year has reached a saturation point,” the report states.

While total employment remains low at 2.5%, youth unemployment reached 9.4% in 2014 and expected to rise.

According to the report, currently, the private sector, limited in size, plays a limited role in the economy.

In 2014, 99% of the country’s approximately 42,000 businesses were micro or small sized, only about 350 were limited liabilities companies (LLC) and a handful were joint-stock companies and partnerships.

“The competiveness of Bhutan’s nascent entrepreneurial sector is affected by the country’s challenging terrain, limited access to finance and markets, a difficult investments climate, and low productivity levels,” states the report.

The report also states that a simple, predictable and easily accessible investment climate can contribute to investment attraction and job creation.

In addition, a pro-active public policy to crowd on private investments through smart procurement, shifting finance from the supply of service delivery to the demand side and developing more systematically smart partnerships with private sector would help the country’s economy.

Pema Seldon from Thimphu