Government’s austerity measures hits the economy

The cost cutting measures adopted by all government agencies as notified by the finance ministry in the wake of the country’s Indian Rupee (INR) shortfall and liquidity crisis has had a visible impact across the country, particularly in the private sector.

In the fiscal year (FY) 2012-2013 budgets, provisions for furniture and computers were allocated only for schools under government funding and no budget was allocated for purchase of vehicles, staff quarter construction, fencing, wall and gates.

While hospitality and entertainment budget has been reduced by 20%, budget for in-country travel has been reduced by 10% from FY 2011-12. Budget for government advertising was also drastically reduced compared to the previous year. While budget will be provided only for mandatory participation in regional or international meetings, no provisions have been made for annual conferences.

The worst hit is the automobile industry whose biggest customer is the government which in ordinary years purchased large numbers of third country and Indian vehicles. The automobile industry was already suffering the wrath of the INR shortfall and credit crisis.

One main government vehicle supplier was STCBL. CEO of the state trading corporation of Bhutan limited (STCBL) Dorji Namgay said there has been close to zero supply of vehicles for government agencies this year.

“I think such measures are necessary for the good of the nation’s economy but the implementation and monitoring of such measures are entirely different,” he said.

“As a business entity the measures adopted by government is bad as business had to come to a standstill because of no prior warnings or notifications from the government about such measures,” he added.

STCBL is in the process of implementing internal cost cutting measures and effective strategies to cope with the situation.

This is the same picture in other automobile companies which in addition to existing problems of a liquidity crunch is not getting any government business.

Meanwhile, the ramifications haven’t spared even small time business people such as stationary shops. “We receive very less supply orders or tender notices from the government compared to the past but the main ones affected may be the large scale business people,” said a stationery store in the capital.

There has been a significant reduction in the amount of stationery purchased by the government.

Earlier hotels and restaurants in Thimphu and also other parts of the country did a brisk business supplying food and drinks for government functions. Even private traditional dance agencies would see regular business. However, business from the government has fallen significantly for all these food and entertainment businesses.

The government has also reduced its purchase of computers and spares affecting IT vendors who mainly look to the government for business. “There is a clear and visible drop in government expenditure which is affecting IT vendors,” said a prominent IT vendor in town who wanted to remain anonymous.

One major avenue for income for many in Thimphu is consultancy. However with strict orders to reduce expenditure many consultancy firms have seen a marked drop in consultancy jobs from the government.

A few contractors that The Bhutanese talked to said there has been little or no works awarded at all during the year which has had direct impact on businesses. “Even after getting a contract after trying hard to win the tender, it takes a lot of time for the government to release funds but they cite the Rupee crisis and formality issues,” a contractor in the eastern region said.

With the twin effect of less government jobs and a liquidity crunch some construction firms are on the verge of closing shop.

One of the measures adopted by government agencies is limitation on foreign travel under government funding. Travels abroad under government funding according to the circular is confined only to those cases involving bilateral and multilateral commitments. Restrictions are also in place as to who is entitled to travel by business class.

Although, the impacts on airline companies are not significant, there has nevertheless been some effect on business. Ticketing firms who also depend for a significant part of their non tourist income on government travels have seen little business.

Drukair’s commercial manager, Tshering Penjor said “It’s not up to the extent that the company earnings will drop because of government’s cost cutting measures but there is an effect on business.”

In a country where sustainability and survival of all private newspapers is almost dependant on revenue from government advertising, the future looks bleak as some media houses haven’t paid their employees for months. One major reason for this is the drastic cut in advertisement budget by the government.

“I haven’t been paid a single penny for almost six months. It’s like we are working for some charity organization without pay and still there is no news of cash coming in any sooner.” a working journalist said.

The finance ministry circular states that “the type of media used must be most suitable and appropriate in terms of budget availability, type of advert and reach required, and that there is no need to have advertisements put in all papers at the same time. Advertisements on glossy paper and long supplements shall not be permitted.”

The total projected government budget for the FY 2012-2013 as presented by the finance minister Wangdi Norbu to the parliament last summer is estimated to Nu 34.5 bn down from the previous year’s Nu 37.9bn. However, despite all the cost cutting measures, the government’s current expenditure increased to Nu 18.3bn, which is an increase by Nu 1bn from the previous financial year.

Talking to The Bhutanese a senior official with the department of national budget said it is impossible to maintain the same level of current expenditure every year owing to expansion of civil service base, new projects and up gradation of schools and basic health units among others.

“Salaries of civil servants by default increases by certain percentage every year and many schools around the country are either upgraded or provided with additional facilities such as hostels and food supply for boarding students. Moreover, many civil servants undergo promotions and that entails additional budget,” the official said.

He said the cost cutting measures shouldn’t have a significant impact on the private sector. “It is aimed at reducing wastage and making optimum utilization of available resources,” he concluded.

In the FY 2012-2013 budget, current expenditure of more than Nu 1bn has been budgeted to cover subsidy requirements of the Education city, Bhutan broadcasting Service Corporation, Thromdes, Druk Air Corporation, Rural House Insurance Scheme, Royal University of Bhutan and Bhutan Chamber of Commerce and Industry.