Hydropower debt continues dominance  

At Nu 167.73bn, hydropower debt comprises 69.6% of total external debt

The total public debt stood at Nu 267.401 billion (bn), accounting for 132.1% percent of the fiscal year’s (FY) 2022-23 gross domestic product (GDP) estimate as of 31st March 2023. 

According to the budget report for FY 2023-2024, total public debt has soared to Nu 240.85bn, accounting for 119% of GDP of the external debt stock and Nu 26.550bn, which is 13.1% of GDP of the domestic debt stock.

The debt comprises hydropower debt, which stands at Nu 167.73bn, making up 69.6% of total external debt and 82.8% of GDP. The non-hydro debt at Nu 73.11bn, leads to 30.7% of total external debt and 36.1% of GDP.

The Public Debt Policy 2016 requires the non-hydro debt stock to be within 35% of GDP during a five-year plan period. The average non-hydro debt ratio to GDP for the past four years, including 31st March 2023 of the 12th fiscal year plan (FYP) is 31.5% and is, therefore, within the threshold.

A major share of the public debt comprises the external debt mainly on account of borrowings for hydropower development in the country and availability of concessional borrowings from development partners.

Similarly, in FY 2023-24, the total public debt is estimated at 134.9% of GDP. With regard to non-hydro external debt, it is expected to reach 36.4% of GDP in FY 2022-23 and 37.1% of GDP in FY 2023-24 respectively.

The domestic debt which forms a marginal portion of the public debt is expected to grow in the foreseeable future.

The Public Debt Policy 2016 prescribes thresholds for several external debt indicators to ensure that the country’s debt is sustainable. The external debt indicators are measured against the threshold prescribed by the Policy.

Meanwhile, the ratio of external debt service to exports measures how much of the country’s export earnings will be used for servicing its external debt obligations. The Public Debt Policy sets the threshold of this ratio at 25%.

The external debt service to export ratio is expected to remain within the 25% threshold because of the commissioning of the Nikachhu Hydroelectric project in December 2023 and Puna II in December 2024.

The budget report states that these projects will increase exports but will also increase the debt servicing. However, the growth in export earning is expected to outweigh the growth in debt servicing.

Similarly, the hydro debt service should not be less than 1.2 and in FY 2023-24, the expected debt service coverage ratio is 1.7 while in the medium term, its coverage ratio is projected to improve beyond 2, which would be an ideal debt coverage ratio.

The total debt servicing including interest and principal payments in FY 2023-24 is projected at Nu 14.53bn, of which interest payment is Nu 5.38bn and principal repayment Nu 9.15bn. 

In addition, the external debt service for FY 2023-24 is estimated at Nu 9.4bn of which more than 50% is on account of debt servicing for the Mangde Chhu Hydro Power loan. The domestic debt servicing accounts for 34.7% of total debt service in FY 2023-24.

The spike in domestic debt service is attributed to the redemption of the first 3-year government bond issued in September 2020 amounting to Nu 3bn.

The budget report 2023-2024 also aims to achieve sustainable development by maintaining a sound fiscal position and investing in the future of Bhutan.

The report states that the government is committed to maintaining a sustainable fiscal path through effective public finance management, while ensuring that its policies promote macroeconomic stability and long-term economic growth.

To support the fiscal policy statement, the government shall make necessary fiscal consolidation by focusing on revenue mobilization, ensuring prudent public expenditure, focus on expenditure rationalization while ensuring that investments are scrutinized to ensure returns on investments.

The Fiscal Policy Targets for FY 2023-2024 shall aim to maintain fiscal responsibility by keeping the fiscal deficit within the manageable limits and maintaining sustainable levels of public debt. Meanwhile, the FY 2023-2024 budget aims to fulfill the fiscal objectives by setting the fiscal targets of containing fiscal deficit at 7% of GDP, Tax to GDP ratio of at least 15%. The other aims are to ensure recurrent expenditure to be covered by domestic revenue and non-hydro external debt to be maintained below 35% of GDP on an average of five years.

Sherab Dorji from Thimphu