PEMA TSHOMO
Thimphu
Facing the aftermath of the COVID-19 pandemic, the government has placed “Accelerating Economic Recovery” at the forefront of its Financial Year (FY) 2022–23 budget.
Through strategic investments in food self-sufficiency, human capital development, sustainable infrastructure, and improved social security, the government aims to rebuild and strengthen the nation’s economy while maintaining fiscal responsibility.
This year’s budget marks a marginal increase in total government expenditure, rising from Nu 69,156.6 million (M) in FY 2021-22 to Nu 69,226.2 million, representing 28.6 percent of gross domestic product (GDP). This prudent approach demonstrates the government’s commitment to achieving sustainable and inclusive growth without jeopardizing fiscal stability.
The country’s FY budget paints a roadmap for a resilient future, strategically investing in four key areas such as food self-sufficiency to reduce import reliance and bolster domestic production; human capital development through education, healthcare, and skills training; sustainable infrastructure developmentby upgrading transportation, energy, and digital networks; and improved social security for vulnerable populations.
This multi-pronged approach aims to empower citizens, drive economic growth, and ensure a stable, inclusive future for all Bhutanese.
Balancing Current Needs with Future Investments
The Government’s recent budget report sheds light on its spending priorities for FY 2022–23. The report reveals a cautious approach, balancing essential current expenditures with strategic investments for the future.
Current expenditures, primarily covering day-to-day operational costs, increased by 2.9 percent to Nu 35,428 M. This rise stems from increased spending on medical benefits, retirement benefits, interest payments, and property maintenance.
Notably, pay and allowances for public servants remain the largest expenses, consuming 48.7 percent of the current budget. This highlights the government’s commitment to its workforce while demanding efficient resource allocation.
Interest payments, primarily due to internal borrowing through government bonds, Treasury Bills, and advances from the Royal Monetary Authority (RMA), reached Nu 4,036.5 M. This signifies the government’s reliance on domestic borrowing to finance current needs, potentially impacting future fiscal flexibility. Additionally, overdraft facilities from the Bank of Bhutan were utilized for further short-term funding.
The report clarified that other significant current expenditures include grants, supplies and materials, retirement benefits, the Provident Fund, and pension contributions. These combined expenses represent 23.2 percent of the total current budget.
Interestingly, a high public servant attrition rate during the review period led to increased spending on retirement and Provident Fund and Pension contributions, totaling Nu 1,136.6 M and Nu 1,527.6 M, respectively.
Strong revenue growth and decreased capital expenditure
Tax collection, the backbone of domestic income, has increased by an impressive 21.8 percent, and the total revenue collected was Nu 31,466.7 M.
This surge reflects improved efficiency in gathering direct taxes on income, profit, and capital gains, as well as indirect taxes from international trade and transactions.
Additionally, current revenue from government agencies witnessed a commendable 22.2 percent growth, fueled by increased administrative fees and sales of goods and commodities.
However, concerns arise when examining the capital expenditure side. Despite the positive revenue trends, investments in infrastructure development, a cornerstone of long-term prosperity, saw a 2.6 percent decrease.
The shift likely reflects the government’s focus on immediate needs like healthcare and public servant salaries. While understandable, it raises concerns about future growth and the sustainability of relying on domestic borrowing to finance current operations.
Strong Revenue Offsets Borrowing, But Public Debt Concerns Linger
Increased revenue collection helped contain the budget gap of 4.6 percent of GDP. This was achieved through a mix of borrowing externally and domestically. Interestingly, domestic debt repayment outpaced borrowing, leading to a negative net domestic borrowing figure.
Despite this good management, the total public debt continues to grow, exceeding 114 percent of GDP. This rise is concerning, as the previous year’s debt-to-GDP ratio was already high.
Digging deeper reveals further complexities. External debt, the dominant chunk, is heavily tied to hydropower projects accounting for about 70 percent.
Furthermore, the large portion of debt denominated in Indian rupees exposes Bhutan to currency fluctuations that could impact repayment costs. Balancing infrastructure needs with fiscal sustainability while diversifying debt sources is a complex challenge.
However, the government is making efforts to manage debt. Issuing domestic debt instruments for specific purposes shows proactiveness. Nevertheless, a comprehensive debt management strategy is crucial, balancing infrastructure investment with long-term financial health.
Moving forward, navigating this fiscal tightrope requires careful steps. Prioritizing efficient spending, exploring alternative infrastructure financing, and diversifying debt sources are key aspects of a sound debt management approach. Additionally, transparent and accountable public finances are essential for building trust and enabling informed decision-making.
Bhutan’s recent budget reflects a nation facing complex fiscal challenges. While strong revenue growth offers some relief, the rising public debt, particularly linked to hydropower projects, demands close attention. By implementing a strategic debt management plan and fostering broader economic growth, Bhutan can navigate this fiscal tightrope and secure a more sustainable future.
The country’s FY 2022–23 budget offers valuable insights into the government’s financial priorities. While the focus on immediate needs is crucial, a long-term vision that prioritizes strategic investments in infrastructure development is equally important.
During the review year, the inflows in the capital account experienced a significant growth of 26.3 percent from Nu 7,758.7 M in the previous year.
Hydropower Grants Drive Inflows
The report presents that the capital inflows in the country have persistently relied on external financing, primarily in the form of grants and aid for both hydropower and non-hydropower development projects. These grants raised nearly Nu 1.539 billion (B) to Nu 4,398 B. Conversely, there was a 13.1 percent decline in non-hydropower grants.
An increase in hydropower-related borrowings by 35.8 percent dominated the financial account from the previous year. However, non-hydropower borrowing through commercial credit loans decreased by 6.5 percent. Loan repayments totaled Nu 50.9 B, with a mix of concessional and hydropower-related debt.
The report, presented as of June 2023, states the country’s external debt, currently at USD 3.2 B (108.5 percent of GDP), fuels investments in key sectors like hydropower. While these self-liquidating loans hold promise, a recent surge in foreign currency debt raises concerns about long-term sustainability.
Hydropower projects make up 58.1 percent of the debt portfolio, leveraging the country’s vast potential in this sector. However, a 13 percent rise in foreign currency loans requires careful management to ensure affordability and debt service payments remain manageable.
So, the overall debt servicing remained stable compared to the previous year. The key challenge lies in balancing future investments with long-term debt sustainability, ensuring growth without overburdening future generations.
