Bhutan's public debt exceeded 100% of GDP by 2025, driven primarily by India-financed hydropower loans that account for over 60% of external borrowings. Chronic project delays and cost overruns have intensified concerns about fiscal sustainability and policy independence.
Bhutan's foreign debt crisis refers to the country's escalating public debt burden, which surpassed 100 percent of gross domestic product (GDP) by mid-2025. The crisis is overwhelmingly driven by loans from India for large-scale hydropower projects, which have experienced repeated delays and massive cost overruns. While the International Monetary Fund (IMF) has assessed Bhutan's risk of debt distress as "moderate" owing to the revenue-generating nature of hydropower assets, the debt's scale relative to Bhutan's small economy has raised persistent questions about fiscal sovereignty, policy independence, and the sustainability of the hydropower-led development model.
Scale and Composition of Debt
As of June 2025, Bhutan's total public debt stood at Nu 303.9 billion (approximately $3.45 billion), equivalent to 100.5 percent of GDP. The Ministry of Finance projected this would rise to 113.9 percent of GDP by the 2025–2026 fiscal year.[1] External debt constitutes approximately 90 percent of total public debt, making Bhutan one of the most externally indebted countries in South Asia relative to its economic size.
India-backed hydropower loans account for 60.9 percent of Bhutan's total external borrowings, equivalent to roughly 56.2 percent of GDP.[2] The remaining external debt is owed to multilateral institutions including the World Bank, Asian Development Bank (ADB), and the International Fund for Agricultural Development (IFAD), typically on more concessional terms.
Hydropower Financing Model
Bhutan's hydropower sector has been developed through bilateral agreements with India, under which India provides financing as a mix of grants and loans, and Bhutan sells surplus electricity back to India at negotiated tariff rates. The terms of this arrangement have deteriorated over successive projects:
| Project | Grant:Loan Ratio | Interest Rate |
|---|---|---|
| Chukha (1988) | 60:40 | 5% |
| Tala (2006) | 60:40 | 9% |
| Punatsangchhu-I | 40:60 | 10% |
| Punatsangchhu-II | 30:70 | 10% |
The shift from 60 percent grants to 30 percent grants, combined with interest rates of 10 percent on the loan portion, has significantly increased Bhutan's debt servicing obligations. Non-hydropower loans, by comparison, carry an average interest rate of approximately 6.5 percent.[2]
Project Delays and Cost Overruns
Bhutan announced in 2008 a target of 10,000 megawatts (MW) of installed hydropower capacity by 2020. As of 2025, total installed capacity stood at approximately 2,336 MW from completed projects—less than a quarter of the original goal.[3] The most severe delays and cost escalations have affected the Punatsangchhu projects:
Punatsangchhu-I (1,200 MW): Originally estimated at Nu 35 billion with a 2016 completion target, the project has been plagued by slope destabilization and geological setbacks. After 17 years of construction, it remains unfinished, with revised costs reaching Nu 93 billion—nearly triple the original estimate.[2]
Punatsangchhu-II (1,020 MW): Proposed in 2010 with a budget of Nu 37 billion and a 2017 target, PHPA-II was completed nearly eight years late at a cost of Nu 94.45 billion—more than 2.5 times the original estimate. It was jointly inaugurated in November 2024 by Indian Prime Minister Narendra Modi and Bhutan's King Jigme Khesar Namgyel Wangchuck.
Kholongchhu (600 MW): Originally budgeted at Nu 33 billion with a 2020 completion target, the project is now expected by 2029–2030. Even earlier completed projects experienced significant overruns: Chukha's costs rose by 197 percent and Tala's by 193 percent above original estimates.
The Rupee Shortage
Bhutan's currency, the ngultrum, is pegged at par to the Indian rupee but is not freely convertible on international markets. With over 74 percent of Bhutan's trade conducted with India, the country requires substantial rupee reserves to finance imports. Periodic rupee shortages have constrained Bhutan's ability to import essential goods, including food, fuel, and pharmaceuticals. A government-appointed taskforce attributed the recurring rupee crunch partly to private sector consumption growth outpacing rupee inflows, bringing segments of the Bhutanese economy to what observers described as a "virtual halt" during acute shortage periods.[4]
IMF and World Bank Assessments
The IMF's 2024 Article IV consultation assessed Bhutan's risk of debt distress as "moderate," noting that while public debt was high, the "FDI-like nature" of hydropower debt—where projects generate export revenue to service loans—mitigated risks compared to conventional sovereign borrowing. The IMF projected debt would decline over the medium term as completed projects generated revenue. However, it also noted that the current account deficit remained large at 19 percent of GDP, financed mainly through long-term debt from development partners.[5]
The World Bank's joint debt sustainability analysis similarly classified risk as moderate but highlighted vulnerabilities: non-hydro debt had nearly doubled from pre-pandemic levels, and the large external debt and persistent current account deficits remained a "source of vulnerability." Directors stressed the need for "gradual and sustained fiscal consolidation, based on revenue mobilization and spending restraint."[6]
Constraints on Policy Independence
Critics argue that Bhutan's heavy dependence on Indian financing limits its policy autonomy. The bilateral hydropower model ties Bhutan's largest revenue source, electricity exports, to negotiated tariff rates with its sole buyer, India. Tariff negotiations have historically been contentious, with Bhutan seeking higher prices to offset cost overruns and India preferring lower rates. The Royal Audit Authority flagged risks over a decade ago, cautioning that "debt indicators had already breached the Maastricht criteria of 60% of GDP."[2]
The National Council (upper house) has urged the government to stop extending project deadlines and to re-evaluate the viability of future mega-hydropower ventures. Some analysts have suggested that Bhutan should diversify its energy portfolio toward solar and wind to reduce dependence on the bilateral hydropower model.
Comparative Context
Bhutan's debt-to-GDP ratio of over 100 percent is among the highest in South Asia, though direct comparisons require context. Sri Lanka's 2022 sovereign default occurred at a debt-to-GDP ratio of approximately 128 percent, but Sri Lanka's debt was largely commercial and held by diverse creditors, making restructuring more complex. Bhutan's debt is concentrated with a single bilateral partner and tied to revenue-generating assets, which the IMF considers a mitigating factor. Among small states globally, Bhutan's ratio is comparable to countries like Cabo Verde and the Maldives, though the composition differs significantly.
See Also
The Electricity Access Paradox in Bhutan · Druk Holding and Investments · Bhutan–India Relations
References
- Bhutan's public debt to stay high until 2037-2038 FY, current debt stands at Nu 293bn — BBS
- Bhutan's Rising Debt Crisis Tied to India-Funded Hydropower Projects — Newsreel Asia
- What Bhutan's failed hydropower goal means for energy geopolitics — Dialogue Earth
- Bhutan's Indian Rupee Shortage: Macroeconomic Causes and Cures — Asian Development Bank
- IMF Executive Board Concludes 2024 Article IV Consultation with Bhutan — IMF
- How much should Bhutan worry about its public debt? — World Bank
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