Bhutan is at medium risk of debt distress

Dechen Dolkar

With growing public debt, Bhutan is considered to be in the medium risk category for debt service, according to the Public Debt Sustainability Analysis (DSA). DSA refers to the ability to pay long-term debts without liquidity problems.

Public debt sustainability has been one of the main pillars of the government’s fiscal policy. The DSA was conducted using the revised Debt Sustainability Framework (DSF) for Low Income Countries (LICs), which was jointly developed by the IMF and the World Bank.

According to the analysis, as of March 2022, Bhutan’s debt carrying capacity was classified as medium based on the Composite Indicator (CI) of the current DSA. Public debt has been covered for the current DSA on external and domestic public and publicly guaranteed (PPG) debt of general government and domestic debt of public enterprises under the Ministry of Finance.

The benchmark for public debt (PPG external debt plus PPG domestic debt) for the country with medium carrying capacity is the present value of total public PPG to GDP of 55%.

It indicates that if mechanically rated, the country’s public debt level would be considered a “high risk” of distress since all indicative debt thresholds are breached even in the baseline scenario.

However, he mentioned that the judgment was used to arrive at the final risk rating of “moderate risk” of debt distress due to the unique nature of the country’s debt portfolio, as more than 70% of external debt is hydroelectric debt, which is considered autonomous. -liquidation.

It also indicates that the hydropower debt service coverage ratio is high, indicating that the operating profit is sufficient to cover the hydropower debt service.

“The electricity export tariff is set taking into account the total cost of the project plus a certain margin and more than 98% of the total public debt constitutes fixed rate debt, which reduces interest rate risks. interest,” he said.

Debt denominated in INR constitutes a major proportion of total external debt. However, Ngultrum pegged at par to INR reduces exchange rate risks.

Moreover, most of the hydroelectric debt is denominated in Indian rupees.

Hydro debt risks are considered low as debt service for India hydro loans does not commence until one year after project commissioning, ensuring revenue inflow is in place when debt service begins, thereby mitigating liquidity risk.

The electricity export tariff is set taking into account the overall cost of the project, including the projected cost of servicing the debt. This implies that there would be revenue from the sale of electricity which would provide an adequate cushion for servicing the debt.

Meanwhile, the public debt-to-GDP ratio increased further at the end of the 2020-21 fiscal year to 134%. The drastic increase in the ratio is due to a higher level of external and internal borrowing during the year to meet the financing needs of the Covid-19 measures.

The analysis also indicates that medium and long-term growth will be mainly driven by the commissioning of ongoing hydroelectric projects over the next three years.

It says the commissioning of hydropower projects will significantly increase the country’s exports to India, while supporting the funding of Bhutan’s upcoming 13th Plan through increased revenue contribution to the government in the form of royalties and taxes.

In addition, the country’s openness to tourists should also have a significant positive impact on economic growth in the medium and long term.

For the 13th FYP, which will begin in July 2023, the average annual growth rate of public investment has been projected at 12%.

“Domestic revenue is also expected to improve significantly over the plan period due to the commissioning of ongoing hydropower projects, improved collection through better enforcement, digitalization and tax reforms. and taxes,” the report said.

Mid-term electricity export during the 13th FYP is expected to average Nu 65.77 billion per year from an annual average of Nu 23.47 billion during the 12th FYP.

The Public Debt Policy 2016 also stipulates that the DSA is one of the risk assessment and monitoring tools and requires the Ministry of Finance to conduct periodic DSA to monitor the risks and potential vulnerabilities of the debt. Bhutan’s public debt.


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John A. Bogar