The external debt ceiling on non-hydro loan, which came into effect with the public debt policy initiated by the former government, is now under the radar of the current government.
The public debt policy, which was introduced in 2016, sets thresholds for non-hydro power debt stock at 35 percent of gross domestic product (GDP) during the Five Year Plan period, while the general government debt is capped at less than 22 percent of domestic revenue in any given financial year.
The policy also states that Bhutan’s annual debt service obligations of total external debt should not exceed 25 percent of total exports of goods and services.
The thresholds can be breached only in times of economic crisis and other times when the government has no means to raise additional debt to maintain socio-economic stability. The government will have three years to stabilise the economy under such conditions.
Even with regard to the hydropower-related external debt, the government has to maintain a ratio of debt service to hydropower export revenue of less than 40 percent. The debt to equity ratio of hydropower projects cannot exceed 70:30.
The thresholds are to reduce the undue debt burden that might arise from indiscriminate borrowing for social projects that do not necessarily guarantee financial returns. Other considerations are aimed at ensuring fiscal discipline and avoiding ad-hoc, short-term borrowing that are, generally, costly.
However, the Prime Minister Dr Lotay Tshering said this ceiling, especially the non-hydro debt, was restricting the financial needs of the country when capital investment is required the most.
He said that the finance ministry was asked to come up with a report as to how much and what kind of borrowings the country could avail as LDC and to identify the capital investment needs.
“After we graduate in 2023, interest rates become higher and some doors may close,” he said. “This is the only time we can borrow at zero or minimum interest and we are restricting ourselves…If we have to borrow more, we might have to change the policy.”
As for the 12th Plan the fiscal deficit is Nu 29B; the government will source Nu 25B from domestic borrowing. The remaining Nu 4B would be sourced through subordinated debt with zero interest from World Bank, Asian Development Bank, and International Fund for Agriculture Development (IFAD).
However, Tthe government’s pledge to establish another national referral hospital, provide free wi-fi, launch sung joen app and provide breast-feeding allowances, among others, are not budgeted in the 12th Plan.
If the government is to implement all its pledges, Lyonchhen during the first meet-the-press session held in December last year, said that projected fiscal deficit, which is the budgetary gap between the total expenditure and resources (revenue combined with grants), could touch Nu 40B against the projected Nu 29B.
According to the figures from the RMA, of the Nu 188B outstanding loan as of June this year, Nu 4.9B pertains to debt availed from World Bank, Asian Development Bank, IFAD, Austria, and Japan, basically the non-hydro convertible currency debt.
About Nu 14B outstanding debt are on account of GOI line of credit and RBI swap arrangement. The remaining are the hydropower debt which the IMF also labelled as debt with modest risk and commercially viable.