Discussions in the Parliament have drawn attention to an increase not just in the total external debt but particularly to the surge in the non-hydro component of the debt. As of 31 March 2026, Bhutan’s total public debt stood at Nu 306.3 billion, equivalent to 90.6 percent of GDP. External debt accounts for Nu 285.2 billion of this. Hydropower-related borrowing constitutes 58.3 percent of total debt and the remaining 41.7 percent, or approximately Nu 119 billion, is classified as non-hydropower external debt.
While hydropower-related borrowing remains largely self-servicing through project revenues and export earnings, increasing attention is being drawn to the remaining 41.7 percent debt as this portion must be serviced directly from domestic revenue, placing it at the centre of Bhutan’s fiscal pressure. Though revenue generation has increased, the expansion in the non-hydropower debt offsets any increase. There has thus been a widening gap between domestic revenue capacity and non-hydropower debt obligations. This divergence is emerging as a key structural issue with long-term implications for fiscal space, development financing, and economic resilience.
Over the past decade, non-hydropower debt has expanded significantly, rising from an estimated Nu 25–30 billion in the mid-2010s to about Nu 119 billion today, which is an increase of nearly fourfold.
In comparison, domestic revenue has grown at a more moderate and cyclical pace. It increased from roughly Nu 35 -45 billion in the mid-2010s to the Nu 50-65 billion range in the early 2020s. More recently, it stood at Nu 56 billion in FY 2023–24 and rose to about Nu 63.7 billion in FY 2024–25. This growth has been driven by stronger income and corporate tax collections, expanded goods and services taxation, improved compliance, and the gradual formalisation of economic activity. While these gains are significant, they have not matched the pace of non-hydropower borrowing.
The result is a widening structural imbalance, where debt accumulation is growing faster than the domestic revenue base required to service it. Non-hydropower debt now stands at nearly two years of Bhutan’s annual domestic revenue, underscoring the scale of repayment pressure. While this is a theoretical comparison, it highlights the extent of fiscal exposure if domestic revenues were to be fully directed toward debt servicing obligations.
The concern lies not only in the absolute level of debt, but in the underlying asymmetry between two fiscal dynamics. Debt is accumulated on fixed repayment schedules with interest obligations, while revenue grows gradually, unevenly, and remains sensitive to economic cycles. This mismatch becomes more pronounced over time, particularly in small and narrow economic structures.
What is important to look into is the fact that despite hydropower continuing to provide a strong stabilising foundation for Bhutan’s fiscal position it does not fully offset pressures in the non-hydropower segment. In other words, although hydropower-related debt is largely self-financing through electricity exports, it does not directly contribute to servicing non-hydro obligations, which remain dependent on domestic fiscal capacity.
The above divergence between revenue and non-hydropower debt has become increasingly visible over the past decade. While domestic revenue has grown steadily, non-hydropower debt has expanded at a significantly faster pace. The implication is a structural gap between what the economy generates internally and what it is required to repay from external obligations outside the hydropower sector.
While this imbalance may not be an immediate crisis, it is increasingly manifesting as a fiscal constraint. One of the most direct implications is the gradual compression of fiscal space, as a rising share of domestic revenue is absorbed by debt servicing requirements. This reduces the proportion of funds available for new capital investment, social programmes, and infrastructure development.
Over time, this dynamic can also increase dependence on external borrowing to sustain development expenditure, particularly if revenue growth does not accelerate. It may further heighten fiscal vulnerability to external shocks, including fluctuations in tourism, hydropower generation, trade performance, or external aid flows.
Another emerging risk is the potential crowding-out of development priorities. As debt servicing obligations grow, discretionary spending on sectors such as health, education, infrastructure, and employment generation may come under increasing pressure. This could slow the pace of economic diversification at a time when Bhutan is seeking to broaden its growth base beyond hydropower.
At its core, the issue reflects a structural limitation: domestic revenue, while improving, has not yet expanded at a pace sufficient to match the accumulation of non-hydropower liabilities. The economy remains relatively narrow, with a limited private sector base and constrained high-productivity sectors, which limits the speed of revenue expansion.
Additionally, the argument that Bhutan’s non-hydropower debt is concessional in nature and that Bhutan benefits from relatively low interest rates, longer repayment periods, and softer financing terms is there. However, concessional debt should not be mistaken for cost-free debt. Even soft loans must eventually be repaid.
At such a position, Bhutan’s policy implication is therefore not limited to debt management alone, but extends to accelerating and broadening revenue growth. This includes strengthening tax administration, improving goods service tax (GST) efficiency, expanding the corporate sector base, enhancing returns from state-owned enterprises, and promoting higher-value sectors such as tourism, agriculture exports, and digital services. Equally important is ensuring that public investments generate stronger economic returns that feed back into the fiscal system.
Ugyen Tenzi, Thimphu
