Govt to borrow heavily and invest big to revive economy and avoid GDP slump during transition

The Prime Minister Dasho (Dr) Lotay Tshering and the Finance Minister Lyonpo Namgay Tshering both said Bhutan would not only have to go beyond the 12th plan, but also borrow large amounts for projects to help revive the economy, and also avoid a slump during the transition period in late 2023 and 2024 when a new government is coming in.

Lyonchhen said that for any economy to be revived or pulled out of turmoil a liquidity injection is required.

Debt ceiling and transition dip

Lyonchhen said, “Through this unexpected COVID turmoil I don’t think we can restrict to our usual norms of 12th plan activities, usual norms of 12th plan budget outlay, usual norms of debt ceiling (non hydro).”

“The non hydro debt ceiling (35 percent of GDP) need not be followed like it is written on the stone as long as our conscience is clear and as long as we can justify. I think we must not take these constraints as hard and fast,” he added.

However, the PM also clarified that any borrowings would only go into prudential investments.

As of March 2021, the annual Budget report showed total external debt at Nu 224.909 bn of which hydropower is Nu. 160.035 bn accounting for 74.2 percent of total external debt.

The non-hydro debt is Nu 55.787 bn and is about 29.9 percent of GDP.

 “His Majesty repeatedly said there is always a dip in the economy during the change in the government, and this time it will be even more grave because at other times it is a normal economy dipping, but now since it a strained, sick and diseased economy -the impact will be grave. Different teams are working on it,” said the PM.

Lyonchhen said in 2008 it was a bit different transition, but in 2013 and 2018 it was a political transition and so there was a clear dip in the GDP.

He said the government has to design some injection into capital activities that will sustain the economy for two to three years from 2022 to 2024 with 2023 being right in the middle.

In 2020 the GDP dropped to -10.08 percent and the projection is that it will jump back to 4 percent in 2021.

For the government to have a 5 percent growth in 2022 to 2023 financial year (FY) the government will have to spend Nu 20 bn on capital works which is Nu 7 bn more than for which it has resources.

Overall public debt including hydropower is, 122.7% in 2021/22 FY and is expected to jump to 138.8% in 2022/23 FY.

“These are unprecedented and unusual times and we need billions extra to revive the economy. It is not humanly possible to stick within the 12th plan outlay,” said Lyonchhen.

Giving the example of buying a car he said one cannot buy a top end car with a few lakhs in hand as one would have to look for more money and buy a better car.

Lyonchhen said that how much ever the government borrows, it is still very much within the public debt policy of 35 percent unless they want to borrow substantially for a major billion-dollar project.

Investment areas

The Finance Minister Lyonpo Namgay Tshering said, “If I borrow as a Finance Minister, I will be extra prudent and I will not borrow for anything that is not required. I will borrow only for two broad investments. The first will be the infrastructure development and second will be Human Resource Development.”.

Lyonpo said Human capital formation is very important as we have to derive the population dividend and here the focus is on skilling programs.

In terms of infrastructure he said the focus is in terms of road connectivity, road network, urban amenities, affordable housing, ICT connectivity, renewable energy (see separate story on page 4). 

Not worried about fiscal deficit and borrowing is need of hour says FM

The Finance Minister Lyonpo Namgay Tshering said, “I am not concerned about the fiscal deficit, but I am concerned about how we can expedite government expenditure and spending.”

He said he is willing to come all out and develop the bond market which is the sale of government bonds to raise money internally.  He said one of the means during such unprecedented times is to develop the bond market.

The minister said in the current situation banks are bearing the brunt of increasing deposits where as on the other side there is a clear lack of investment opportunities and people are not willing to invest now.

“Rather, people are feeling secured to keep money with the banks, and that is the case right now,” said Lyonpo.

He said the government should play an equalizer role. He said a deficit is very subjective and part of the conventional norms that cannot be applied right now. He gave the example of someone needing 100 mn for running a business but having only 20 mn in the account, and needing to take some risk and borrow the remaining 80 mn.

He said that right now deficit is not a concern, but the government has to inject money into the economy as much as possible.

“The moment we inject money into the economy, employment will come up,” said Lyonpo.

The minister said that debt in this context is the non-hydro debt or the budget debt.

He said until now when it comes to non hydro debt they have never crossed 35 percent of GDP.

“If you are to seriously invest in our economy the deficit has to be bigger. We can comfortably go up to 35 percent as basically you are pumping money into the economy. Now you should not shy away from borrowing. When you borrow you have to be cautious and prudent and see from where to borrow, what are the lending terms, what are the future risks in terms of repayment and is it going to make sense where we are investing the money,” said Lyonpo.

“So basically when you borrow and you cross the threshold as in if our government sets up another threshold in terms of borrowing then that borrowing will not go as budgetary support or conventional developmental activities like construction of farm roads or whatever,” said Lyonpo.

He said such borrowing will go into project specific activities which will ensure return on investment.

The Finance Minister said that currently the non-hydro debt position is around 28 percent and there is a lot of space to reach 35 percent.

He said even this 35 percent will never remain constant because some loans will mature and be liquidated. The minister feels that they will not cross 35 percent of the GDP.

He said that the 35 percent non hydro debt ceiling is not magic. “If the requirement is there and if the opportunity for investment is there you can blow up and inflate. It is a project based investment. You cannot have a meal at Taj if your budget is only Nu 200. To have quality of meal and satisfaction you should be willing to invest,” he added. 

Lyonpo said that as far as internal revenue is concerned they are going as per the projected figure and are comfortable as of now. He said there is enough money to meet the current expenditure and until now they are going on undisrupted.

Managing debt this year and borrowing externally

The Prime Minister said since the 2021/2022 budget is designed during the pandemic there is enough provisions with the government keeping Nu 36 bn in capital injection of which the government borrowed Nu 17 bn from internal borrowing like bonds and T-Bills. 

Lyonchhen said that even for the 36 bn the completion rate would be around 85 to 90% by the end of the financial year.

The PM said local banks have the carrying capacity to lend 17 bn easily without crowding out private sector especially since the banks’ lending rates have gone down.

However, he said the impact is totally different for the public debt management of other times and now, and internal borrowing from the banks when the banks have a lot of borrowers versus borrowing from the banks when the banks do not have borrowers.

Lyonchhen said currently since the banks have less borrowers it is the government’s duty to borrow.

He said overall, in the 12th plan or even this year, if with relaxations and with more opening up -the consumption or spending capacity increases, then the government has to inject more.

Lyonchhen said while for this year they do not require external borrowing, they cannot carry on this same trend in the next year, because the banks have to inject liquidity internally.

“So here we will have to borrow (externally) if the situation continues and how much we have to borrow externally or borrow or not depends on what kind of revival we want to have and how much GDP growth we are trying to stimulate or inject,” Lyonchhen added.

However, he said if the economy and local revenue picks up by the year’s end then the amount they may need to borrow externally maybe lesser.

Lyonchhen said that in the 12th plan the fiscal basket and capital activities basket have not changed a lot.

He said if they are to have newer capital expenditure windows to open then they need to borrow externally to fund these activities because the 12th plan itself is on a budget deficit.

The government’s external borrowing is more or less fixed with Asian Development Bank (ADB) or the World Bank and another small window if it covers more than 2 countries is SAARC Development Fund (SDF).

A newer window the government has opened up on an emergency basis is the European Investment Bank (EIB) which can do capital injection into banks, give project based financing or give liquidity support for the banks.

Lyonchhen said the Ministry of Finance (MoF) is working on it.

Lyonchhen said the MoF is exploring WB, ADB and the EIB.

The PM said the government tenure is up to the majority of 2023 which is till October or November, and so it has time until then to make its moves.