Regions and Countries

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p. 5 of 13 BACK | NEXT Map Executive Summary I. Overall Performance During Eighth Plan Period A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. Balance of Payments and External Debt E. Human and Social Development II. Improving Quality of Life for All: The Ninth Plan Appendix

Country Economic Review - Bhutan : I. Overall Performance During Eighth Plan Period

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B. Fiscal Developments

16. The Government has traditionally pursued a prudent fiscal policy, one that is guided by conservative financing principles, notably that domestic revenues should at least cover current expenditures and that capital expenditure should be financed largely from external sources, as far as possible by grants and, after these, by concessional loans. The first of these principles continued to prevail during the first four years of the Eighth Plan, but, during the fifth and current fiscal year, it is possible that a small current deficit of 0.1 percent of GDP could emerge (Table 2). However, this need not in fact eventuate, particularly if, as is common, expenditures fall short of budget. During the Plan, while recurrent expenditures have increased largely as a result of expanded health and education facilities, preparations for the reorganization of the civil service, and salary increases for the civil service, current expenditures have kept remarkably stable as a proportion of GDP (at around 20 percent). On the other hand, current revenues, after rising as a proportion of GDP during the first three years of the Plan, have since fallen. The main reason for this appears to have been the proportionate decline in the tax and nontax revenues emanating from the Chhukha hydropower plant, traditionally amounting to some 40 percent of domestic revenues. While revenues from this increased to 9.2 percent of GDP in FY2000, they are budgeted to decline to 7 percent of GDP in FY2002, a decline that is also registered in nominal terms in the current year (from Nu1,818 million in FY2001 to Nu1,694 million in FY2002).

17. A more significant trend has been the emergence and subsequent increase in recourse to the domestic financing of capital expenditure. This has been the result of accelerated capital investment, including the financing by the Government of a new expressway into the west of Thimphu and a low-income housing estate. Domestic financing of the overall fiscal deficit included the withdrawal of government deposits with the banking system and by the sale of Nu500 million of Treasury Bills on the open market. While this is a more expensive way of financing capital investment than from external grants and traditional domestic revenue sources, it is by no means unsustainable over the short to medium term. It should be recalled that domestic revenues should increase as the Kurichu and Basochu hydropower plants are commissioned over the coming months, and especially as Tala is commissioned in the longer term, particularly if power tariffs are revised upwards. Similarly, the proposed introduction of personal income tax in 2002 should raise tax revenue, although this may not be substantial during the initial period of its introduction, and there is scope for raising revenue through the introduction on a selective basis of user fees in health and education and for improving tax administration. Ways to do this are being actively explored by the Government.

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