Public debt-to-GDP ratio projected to fall

Debt-to-GDP ratio is projected to fall to the threshold level of 55% only by FY 2036-37

The economic contraction in the last two fiscal years pushed up the public debt-to-Gross Domestic Product (GDP) ratio to 134.2%. However, with the easing of the COVID-19 restrictions, the economy is projected to rebound with an average growth rate of 5.2% over the next five years, lowering the debt-to-GDP ratio.

This is according to the public debt sustainability analysis by the Ministry of Finance (MoF).

The drastic increase in the public debt-to-GDP ratio was due to a higher level of borrowings from both external and domestic during the year to meet financing requirements for COVID-19 measures.

According to the public debt sustainability analysis, the external debt comprised mainly the hydropower debt of Nu162.486bn, constituting 73% of the total external debt or 85% of the FY 2021-22’s GDP.

The non-hydro debt stood at Nu 60.231bn, accounting for 27% of the total external debt or 31.8% of the FY 2021-22’s GDP estimate. The non-hydro debt-GDP was within the 35% threshold prescribed by the Public Debt Policy 2016.

However, the public debt-to-GDP ratio is projected to fall to the threshold level of 55% only by FY 2036-37.

As of December 31, 2021, the total public debt stood at Nu 239.792 bn, accounting for 126.8% of the FY 2021-22’s GDP estimate. The external debt accounted for Nu 222. 717bn and domestic debt comprised Nu 17.074bn. Except for FY 2018-19, the public debt-to-GDP ratio has been rising steadily for the last five years.

It has been stated that the ratio dropped in the FY 2018-19 due to a fall in domestic debt as a result of the liquidation of T-bills issued in the previous year.

However, the ratio rose sharply in the FY 2019-20, mainly due to the capitalization of the Mangdechhu Hydropower Authority (MHPA)’s interest during the construction of Nu 12.256bn and a higher level of hydro loan disbursements during the fiscal year.

In addition, the contribution of the current account and FDI to debt-creating flows are projected to be lower in the next five-year period (2021-25) compared to their contribution in the previous five years.

The drop is mainly due to the expected improvement in the current account balance in the medium-term due to the increase in electricity exports to India after the commissioning of the ongoing hydropower projects.

The completion of the hydro projects is also expected to lower imports related to the hydropower projects’ construction, which further improves the current account balance.

According to the analysis report, the hydropower debts are deemed of lower risks compared to other debts since hydropower debt is self-liquidating. The hydropower export revenue is expected to adequately cover the debt servicing cost, as indicated by the past loans that had been availed for financing large hydropower projects which have been serviced and liquidated.

Further, the Government of India (GoI) has guaranteed to buy the country’s surplus electricity, ensuring a market certainty for electricity generated from GoI-financed projects in Bhutan.

“The price for electricity export to India is fixed at cost plus a margin. This price-fixing model ensures that higher debt servicing cost due to the escalation of the project cost is mitigated by a higher export revenue.”

While the INR-denominated stood at Nu 155.183bn and making up about 70% of the external debt, the convertible currency-denominated stood at Nu 67.533bn ($906.74mn), comprising 30% of the external debt.

According to the report, the GoI remains Bhutan’s largest creditor with about 68% of the external loan, followed by the Asian Development Bank (ADB) with 15%, and the International Development Association (IDA) with 12%.

The other remaining five creditor’s loan outstanding accounted for only 5.4% of the total external debt. The debt owed to the GoI and the State Bank of India (SBI) is mainly on account of loans availed for financing past and ongoing hydropower projects in the country.

Except in the FY 2018-19, the external debt-to-GDP has been rising over the last five years mainly because of the loan disbursements for ongoing hydropower projects and increased program borrowings from the ADB and the World Bank.

Over the last five years, the hydropower loan disbursement totaled Nu 42.963bn, averaging Nu 8.592bn per year.

Further, the external debt-to-GDP rose to 124.2% in the FY 2020-21 as a result of larger program borrowings from the ADB and World Bank during the FY. During the FY 2020-21, the government availed additional borrowings from these two multilateral financial institutions for financing the COVID-19 response measures in the country. The FY saw the highest level of program borrowing from the ADB and World Bank compared to any of the past fiscal years.

In addition, there are also loan disbursements of Nu 5.148bn during the FY for the ongoing hydropower projects. On the other hand, the country’s economy recorded its highest contraction in 2020 due to the COVID19 pandemic, worsening the country’s debt-to-GDP ratio.

Kinley Yonten from Thimphu