Bhutan’s total public debt for the Fiscal Year (FY) 2025/2026 is projected to reach Nu 408.6 billion, equivalent to 119.4% of the Gross Domestic Product (GDP), according to the fourth-quarter update released by the Ministry of Finance.
The breakdown includes an estimated domestic debt of Nu 37.3 billion and external debt of Nu 371 billion. Of the total external debt, Nu 249.2 billion is attributed to hydropower projects, while Nu 112 billion is categorized as non-hydro debt.
For FY 2024/2025, 90.5% of public debt is external, with domestic debt comprising the remaining 9.5%. Public debt is anticipated to increase by an additional Nu 89.5 billion in FY 2025/2026, largely to finance budgetary deficits and hydropower-related borrowing.
The Ministry of Finance projects a continued increase in both external and domestic debt levels over the medium term, driven by two primary factors: hydropower disbursements and additional borrowing to address budgetary deficits.
The expansion of external debt is closely tied to Bhutan’s reliance on hydropower development. Hydropower projects, while critical to the country’s economic growth, require significant upfront investments. Additional disbursements for ongoing and new hydropower projects under the 13th Five Year Plan are expected to drive up external debt. For instance, large-scale projects like Punatsangchhu-II (PHPA-II) and other smaller initiatives aimed at boosting renewable energy capacity will necessitate continued borrowing from international financial institutions, such as the World Bank and Asian Development Bank (ADB).
Domestic borrowing is also anticipated to rise as the government seeks to bridge fiscal gaps caused by slower-than-expected revenue growth, particularly in sectors like tourism, which is still recovering from global challenges. The budgetary deficits require the issuance of government bonds and treasury bills to finance public expenditures.
A portion of domestic debt will likely be used to fund critical infrastructure projects, support social programs, and manage short-term cash flow needs. However, increasing domestic debt could lead to crowding out private sector investments and higher interest rates, which may slow down economic growth.
A local economic expert suggests that Bhutan must focus on the efficient utilization of loans by ensuring borrowed funds are invested in projects that yield high economic returns. “There should be revenue diversification, where dependence on hydropower and tourism must be reduced by developing other sectors like agriculture, manufacturing, and digital services. And debt management strategies should be there.”
While debt is an essential tool for financing development, Bhutan’s medium-term strategy must balance investment needs with fiscal prudence. Strengthening public financial management, increasing transparency in government spending, and fostering regional cooperation for stable hydropower exports will be critical to maintaining economic stability and achieving sustainable growth.
Meanwhile, as of September 30, 2024, the total public debt for FY 2024/2025 stood at Nu 319.6 billion, marking a 1.97% increase from Nu 313.4 billion in the previous quarter. This debt level represents 105.9% of GDP. The increase is primarily driven by anticipated loan disbursements from the World Bank and the Asian Development Bank (ADB) to support small hydropower projects initiated during the fiscal year.
The rising public debt has sparked concerns among economists and financial experts regarding Bhutan’s ability to manage and service its obligations while maintaining economic stability.
One financial expert noted that increasing debt levels could lead to higher interest rates and slower economic growth, urging the government to implement measures to alleviate the debt burden. “Policymakers must prioritize reducing public debt to restore fiscal sustainability,” the expert stated.
As of September 30, 2024, Central Government debt had risen to Nu 121.4 billion, up from Nu 112.2 billion as of June 30, 2024. This accounts for 40% of GDP and reflects an increase over the fourth-quarter projections. The rise is attributed to anticipated growth in national financing, which had been at zero as of June 30, 2024.
The Ministry of Finance’s projection of a rising debt-to-GDP ratio underscores the urgency of adopting a proactive and strategic approach to fiscal management. By implementing robust financial strategies and policy interventions, Bhutan can mitigate risks, ensure sustainable economic growth, and maintain fiscal stability in the face of growing challenges.
Sherab Dorji from Thimphu
