Foreign Debt of Bhutan

The foreign debt of Bhutan is one of the most distinctive features of the country's economic profile. As of 31 March 2024, Bhutan's total public debt stock stood at Nu 293,089 million (approximately USD 3.5 billion), representing 109.8 per cent of the estimated GDP for fiscal year 2023-24. This figure places Bhutan among the most indebted countries in South Asia as a proportion of GDP. However, the composition and structure of Bhutan's debt is unusual: the overwhelming majority is linked to bilateral hydropower project loans from the Government of India, which are considered self-liquidating because debt servicing is funded by electricity export revenues under intergovernmental agreements.^[1]

The distinction between hydropower and non-hydropower debt is central to understanding Bhutan's debt sustainability. Hydropower debt, which constitutes 64.1 per cent of total external debt, carries a built-in repayment mechanism: the Government of India commits to purchasing all surplus electricity at a price calculated to cover project costs plus a margin, meaning that revenue from electricity exports provides an adequate cushion for debt servicing. Non-hydropower debt, comprising loans from multilateral institutions such as the Asian Development Bank (ADB) and the World Bank's International Development Association (IDA), is smaller but represents a more conventional fiscal obligation.^[2]

Debt Composition

Bhutan Public Debt Breakdown — As of 31 March 2024
Category	Amount (Nu million)	Share of Total	% of GDP
Total Public Debt	293,089	100%	109.8%
External Debt	261,123	89.1%	97.8%
— Hydropower Debt (GoI)	167,498	57.2%	62.8%
— Non-Hydropower External	93,625	31.9%	35.1%
Domestic Debt	31,967	10.9%	12.0%

By creditor, 65 per cent of Bhutan's external debt is owed to the Government of India, followed by 16 per cent to the ADB and 14 per cent to the World Bank's IDA. The remainder is owed to other bilateral and multilateral creditors.^[1]

Hydropower Debt: The Dominant Component

Bhutan's hydropower projects are developed as bilateral ventures with India under intergovernmental agreements. The financing model typically consists of a mix of grant and loan components from the Government of India. The grant-to-loan ratio has varied by project, generally ranging from 30 to 40 per cent grant and 60 to 70 per cent loan. The loan component carries an interest rate of 10 per cent in Indian rupees, with a repayment period of 15 years commencing one year after the project is commissioned.^[3]

The key mitigating factor for hydropower debt is the tariff structure. The export tariff for electricity sold to India is calculated on a cost-plus basis, incorporating projected debt servicing costs, operation and maintenance expenses, and a return on equity. This means the revenue from electricity sales is designed to cover the debt repayment, making hydropower loans effectively self-liquidating. The Government of India also absorbs financial and construction risks under the intergovernmental framework.

Major Hydropower Projects Driving Debt

Key Hydropower Projects and Debt Status
Project	Capacity (MW)	Status	Notes
Punatsangchhu-I	1,200	Under construction	Revised cost ~Nu 93 billion (nearly triple original estimate); delayed 17+ years
Punatsangchhu-II	1,020	Commissioned Nov 2024	Jointly inaugurated by PM Modi and King Jigme Khesar
Mangdechhu	720	Operational (2019)	Generating revenue; debt being serviced
Tala	1,020	Operational (2007)	Debt substantially repaid
Chhukha	336	Operational (1988)	Debt fully repaid; now a pure revenue generator
Kurichhu	60	Operational (2002)	Grant-financed; no outstanding debt
Nikachhu	118	Under construction	ADB co-financed

The delay and cost overrun of Punatsangchhu-I has been particularly significant for Bhutan's debt profile. Originally estimated at approximately Nu 35 billion, the project's revised cost of nearly Nu 93 billion — almost triple the initial estimate — has substantially increased the total hydropower debt stock. The delay means that revenue generation from the project has been postponed while interest on the outstanding loan continues to accrue.^[4]

Non-Hydropower Debt

Non-hydropower budgetary debt stood at Nu 107,310 million as of March 2024, constituting 36.6 per cent of total public debt and 40.2 per cent of estimated GDP. This debt is owed primarily to multilateral institutions — the ADB (16 per cent of external debt) and the World Bank's IDA (14 per cent) — and finances development expenditure in sectors such as infrastructure, education, health, and governance reform. Unlike hydropower debt, non-hydropower borrowing does not have a built-in revenue generation mechanism and must be serviced from general government revenues.^[1]

Debt Sustainability Assessment

The International Monetary Fund (IMF), in its 2024 Article IV consultation, assessed Bhutan's risk of overall and external debt distress as moderate, unchanged from the 2022 assessment. The moderate rating — rather than high, despite the headline debt-to-GDP ratio exceeding 100 per cent — reflects the self-liquidating nature of hydropower debt. The IMF noted that most outstanding public and publicly guaranteed debt is linked to hydropower project loans from India, which are implemented under intergovernmental agreements where India covers both financial and construction risks and commits to buy all surplus electricity at a cost-reflective price.^[5]

The World Bank has similarly noted that excluding hydropower debt, Bhutan's non-hydro debt-to-GDP ratio is around 40 per cent — a more manageable level by international standards. Nevertheless, both institutions have cautioned that risks remain, particularly from project delays (which postpone revenue generation while debt accumulates), narrow economic diversification, and the vulnerability of government revenues to fluctuations in hydropower output.^[2]

Debt Trajectory

According to government projections, Bhutan's public debt is expected to remain high until approximately fiscal year 2037-38, primarily due to the large outstanding loans for Punatsangchhu-I and Punatsangchhu-II. As these projects are commissioned and begin generating electricity export revenues, debt servicing is expected to accelerate, and the debt-to-GDP ratio should decline. The commissioning of Punatsangchhu-II in November 2024 is a significant milestone in this trajectory.^[6]

Policy Implications

Bhutan's debt structure has several important policy implications. The deep dependence on Indian financing for hydropower creates a bilateral economic relationship with significant strategic dimensions. The cost-plus tariff model, while ensuring debt sustainability, also means that tariff negotiations with India directly affect Bhutan's fiscal position. Furthermore, the concentration of debt in a single sector (hydropower) sold to a single buyer (India) represents a form of economic risk concentration that distinguishes Bhutan from most other highly indebted developing countries.

The Royal Government's Public Debt Policy 2016 set a ceiling on non-hydropower debt-to-GDP and established governance frameworks for borrowing decisions. The policy explicitly distinguishes between hydropower and non-hydropower debt in its sustainability analysis, reflecting the unique self-liquidating character of hydropower borrowing.^[7]