Bhutan – Joint World Bank-IMF Debt Sustainability Analysis

Overview & Synopsis

Bhutan’s risk of overall and external debt distress is assessed as moderate, unchanged from the 2024 DSA.2 While the mechanical results point to a high risk of overall and external debt distress, with breaches in the thresholds for some indicators under the baseline scenario, judgement was applied given the unique mitigating factors. Most of the outstanding public and publicly-guaranteed debt is linked to hydropower project loans from the Government of India. These are implemented under an intergovernmental agreement in which the Government of India covers both financial and construction risks and commits to buy all surplus electricity at a price reflecting cost plus a margin. New hydro projects are envisaged as joint ventures with the private sector and are expected to also include mechanisms to mitigate risks. Within the moderate rating, Bhutan is assessed to have limited space to absorb additional shocks, particularly export shocks. Going forward, a robust fiscal consolidation underpinned by revenue mobilization, a stable peg with the Indian rupee, reforms to improve productivity and competitiveness of the non-hydropower sector, and enhanced debt management would help to reduce the risk of debt distress.