The Finance Ministry’s recently released Annual Macroeconomic Performance and Outlook Report projects a significant increase in Bhutan’s public debt, with figures expected to rise by Nu 90.2 billion (B) in the fiscal year (FY) 2025/2026. This surge is primarily attributed to the capitalization of interest during the construction phase of the Punatsangchhu Hydropower Project II (PHP-II), alongside increasing financial requirements for new hydropower initiatives and budgetary expenditures.
Public Debt Composition
By the end of FY 2024/2025, total public debt is projected to reach Nu 306.3B, reflecting a 4% decline from the earlier forecast of Nu 319B, accounting for approximately 101.79% of the Gross Domestic Product (GDP). This reduction is influenced by factors such as revisions in anticipated external loan disbursements for smaller hydropower projects and the recent liquidation of the Basochhu Hydropower Project (Lower Stage).
The report reveals that a significant portion of Bhutan’s public debt—approximately 90.05%—will be external debt, with domestic debt accounting for just 9.95%. While reliance on external debt poses risks such as foreign exchange exposure and volatile international lending conditions, it also offers opportunities for Bhutan to access cheaper borrowing rates and technical assistance from international development partners.
Short-Term Projections and Trends
Despite the anticipated rise in public debt in FY 2025/2026, the Ministry of Finance (MoF) forecasts a decline in central government debt for FY 2024/2025. According to the ministry’s report, central government debt is expected to decrease to approximately Nu 112.12B, representing 37.26% of GDP, a notable improvement from the first-quarter estimate of Nu 121.44B.
This reduction is attributed to enhanced revenue generation, which has reduced the necessity for domestic borrowings, thereby improving the debt-to-GDP ratio. The Finance Ministry’s Department of Macro-Fiscal and Development Finance highlighted that effective debt management has been possible due to proactive financial strategies. The report also confirms that central government debt remains within the limits set by the public debt management policy, ensuring fiscal discipline.
Strategic Adjustments and Future Outlook
The government’s recent adjustments to its borrowing strategy underscore its commitment to prudent public finance management. The Finance Ministry’s revised approach to program loans reflects a broader recognition of fiscal realities and global economic conditions.
Additionally, the MoF has indicated that for FY 2024/2025, half of the loans from the International Development Association (IDA) are expected to be in the form of grants. This is a crucial development for public debt management, as grants provide financial support without repayment obligations, easing future budgetary burdens.
A financial expert emphasized the need for a balanced approach to fiscal management, stating, “The projected increase in Bhutan’s public debt by Nu 90.2B in FY 2025/2026 highlights the importance of sustainable debt levels. While expanding hydropower capacity and addressing budgetary needs are essential for economic growth, maintaining fiscal stability is equally crucial.”
The expert further noted that strategic financial planning, prudent borrowing practices and a focus on grant funding would be important in ensuring economic stability.
“As Bhutan continues to develop its infrastructure and harness its natural resources, navigating the complexities of public debt will be essential to achieving long-term economic stability,” she said, adding that careful fiscal management and strategic policymaking will allow the country to leverage its strengths while mitigating risks associated with rising debt, ensuring a stable and prosperous future for the nation.
Meanwhile, the Finance Ministry’s proactive policies, as outlined in the Annual Macroeconomic Performance and Outlook Report 2025, reflect a commitment to sound fiscal management and sustainability.
Sherab Dorji from Thimphu
