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Joint IMF/World Bank Debt Sustainability Analysis 20091

Author(s):
International Monetary Fund
Published Date:
December 2009
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Bhutan’s external and public debt dynamics are analyzed within the IMF-World Bank Debt Sustainability Framework for Low Income Countries (LIC-DSA).2Bhutan’s rapid hydropower development will lead to a substantial buildup of external debt, with debt ratios breaching some of the country-specific LIC-DSA indicative thresholds. However, given the commercial viability of the hydropower projects, Bhutan’s strong track record of project implementation, committed donor support and its high level of international reserves, staff’s assessment is that the external debt dynamics continue to be subject to a moderate risk of distress. Nevertheless, the results of the DSA underscore the importance of containing domestically financed fiscal deficits and sustaining economic growth going forward to ensure a declining debt profile.

I. Background

1. Bhutan’s public and publicly guaranteed debt declined to 69 percent of GDP at end 2008/09, 19 percentage points of GDP below its 2003/04 peak.34 The sharp decline in public debt was driven by the completion of the Tala hydropower project that was financed by India, which boosted economic output by 20 percent in 2007, and by the onset of the repayment of the associated rupee debt. Reflecting the favorable fiscal outturns in recent years, domestic debt, all denominated in local currency and held by domestic financial institutions, has also declined.5 External debt, which accounts for more than 97 percent of total public debt, continues to be dominated by the mostly Indian rupee-denominated hydropower sector debt (36 percent of GDP and 54 percent of external debt). Convertible currency debt, accounting for 44 percent of external debt, declined to 29 percent of GDP.6 The actual outturn of public debt indicators for 2007/08 and 2008/09 was slightly more favorable than projected in the previous DSA, as better than expected fiscal balances compensated for the more rapid accumulation in rupee debt and the downward revision of historical nominal GDP figures.

Bhutan: Structure of Public Sector Debt(In percent of GDP)
03/0404/0505/0606/0707/0808/09
Total debt87.687.486.875.666.668.7
Domestic debt6.87.84.73.52.72.1
External debt80.979.682.172.063.966.6
Of which: hydropower projects55.655.956.247.739.236.0
Of which: convertible currency debt33.031.533.130.727.329.1
Source: Royal Monetary Authority of Bhutan; and staff estimates.

II. Underlying Debt Sustainability Analysis Assumptions

2. Under the baseline scenario, Bhutan pursues its planned expansion in its power generation capacity.7 In addition to the Punatsangchu I and Dagachu projects, included in the 2007 DSA, the baseline scenario incorporates two new hydropower projects, Punatsangchu II and Mangdechu.8 Both projects will be financed by the Government of India (GOI) through a combination of loans and grants.9 The intergovernmental agreements are expected to be finalized and signed by end-2009 and project disbursements to begin in 2009/10. Repayments will start after the projects come on stream in 2019. External financing for non-hydropower sector activities is expected to remain predominantly from multilateral and bilateral donors at concessional terms.

Bhutan: Major Hydropower Projects
Date ofInternal Rate
CommissioningInstalled CapacityTotal Costs 1/Financing 2/of Return 3/
(MW)(Percent of GDP)(In percent)
Chukha1986, 198833615GOI: 60 percent grant; 40 percent loan (9 percent interest)16.9%
Tala2006102081GOI: 60 percent grant; 40 percent loan (9 percent interest)11.9%
Punatsangchu I 4/2016109568GOI: 40 percent grant; 60 percent loan (10 percent interest)13.7%
Mangdechu 4/201967270GOI: 30 percent grant; 70 percent loan (11 percent interest)14.3%
Punatsangchu II201999297GOI: 30 percent grant; 70 percent loan (11 percent interest)11.0%
Sources: Department of Energy; and IMF staff calculations.

3. The hydropower sector will also govern the rest of the economy as summarized by the following key baseline macroeconomic assumptions.

  • Real sector: Similar to the spike in real GDP when Tala was commissioned in 2006/07, Puna I, Mangdechu and Puna II will substantially boost economic growth as they come on stream in 2016/17, 2018/19 and 2019/20, respectively. In the interim, growth will be supported by the hydropower construction activities and the commissioning of Dagachu in 2013/14. Real growth excluding hydropower-related activity is projected to hover between 5-6 percent. Inflation is expected to remain in line with price developments in India, with the ngultrum pegged to the Indian rupee.

  • Fiscal sector: Upon completion, the hydropower projects will boost the domestic revenue-to-GDP ratio, which also benefits from a gradual broadening of the tax base and improvement in tax administration.10 External budgetary aid, on the other hand, is projected to decline sharply as a share of GDP as Bhutan’s per capita income rises. On average, the overall fiscal deficit remains broadly balanced over the long term.

  • External sector: The current account is projected to deteriorate over the medium term due to Tala’s debt service and the higher import demand associated with the construction phase of the new hydropower projects. In the long run, as electricity exports more than quadruple, the power sector contributes to balance of payment surpluses.

Key Macroeconomic Assumptions
Baseline10 year
2009/10 -2015/16 -Historical
2014/152029/30Average
Real GDP growth (percent)6.65.98.1
Growth of exports of goods and services (US dollar terms)3.77.02.0
Non-interest current account deficit (in percent of GDP)16.0-3.19.9
Primary deficit (in percent of GDP)-0.8-5.12.2

III. External Debt Sustainability Analysis

A. Baseline

4. Bhutan’s external debt will continue to trace the cycles of the hydropower sector. The PV of external debt as a share of GDP is projected to rise by 47 percentage points between 2009/10 and 2014/15 as disbursements for new hydropower projects pick up.11 The debt ratios remain above the LIC-DSA indicative threshold for strong policy performance countries until 2022/23 for the PV of external debt to GDP, and until 2017/18-2019/20 for the PV of external debt as a share of exports and revenue.12 The commissioning of the new hydropower projects, which also marks the start of the debt repayment, puts the debt ratios on a steady downward trajectory.

5. The debt service-to-export ratio is expected to remain below the indicative thresholds for the entire projection period. The debt service-to-revenue ratio may temporarily breach the indicative threshold as Puna II and Mangdechu’s debt service begins; however, it is expected to remain below the threshold for the rest of the projection period. The high level of foreign reserves, projected to average 10 months of imports and 50 percent of GDP over the period when indicative thresholds are breached (i.e. 2009/10-2023/24), provides further cushion in the unlikely event of debt repayment difficulties.

B. Sensitivity Analysis

6. Bhutan’s external debt profile is sustainable under most alternative scenarios. While the debt ratios are most vulnerable to exchange rate and export growth shocks, as well as unfavorable financing terms, under almost all alternative scenarios considered the debt ratios decline over time, and eventually fall below the thresholds. In case of a 30 percent nominal depreciation in 2009/10, the PV of debt rises to more than 170 percent of GDP and 835 percent of revenue. The debt service-to-revenue ratio is also negatively impacted. However, the exchange rate shock overestimates Bhutan’s debt vulnerability since a large share of Bhutan’s receipts are in Indian rupees which act as a natural hedge to the rupee-denominated debt.13 The export growth shock and higher financing terms for new public sector borrowing also increase the various debt ratios.

IV. Public Debt Sustainability Analysis

A. Baseline

7. The baseline public debt dynamics follows closely that of the external debt. The public debt-to-GDP ratio is expected to rise until the commissioning of the new hydropower projects and then rapidly decline until it reaches 32 percent of GDP by end 2029/30. In light of Bhutan’s strong economic performance, external financing is projected to shrink as a share of GDP, making room for domestic financial markets to play a larger role in financing the development agenda. Domestic debt is projected to reach about 11 percent of GDP by 2015/16 and be contained below that level as share of GDP for the remainder of the projection period.

B. Sensitivity Analysis

8. The public debt ratios remain on a declining path over the long term under various stress tests. Not surprisingly, given the large share of external debt in total public debt and the analysis above, overall public debt is most vulnerable to shocks to the exchange rate. A one time depreciation results in an upward shift in the various public debt indicators without affecting the shape of the debt indicators’ path. However, the sensitivity analysis suggests that under a historical scenario, public sector debt will rise and remain at an elevated level over the long-term. This scenario, which assumes a constant primary deficit of 2.2 percent of GDP (compared to the projected primary surplus of 3.8 percent of GDP over the 20 year period), underscores the importance of containing fiscal deficits to ensure the sustainability of public debt.

V. Staff Assessment

9. The assessment made in the 2007 IMF/World Bank Joint DSA—that Bhutan’s debt dynamics are sustainable but subject to a moderate risk of distress—still holds.

  • The addition of the two new hydropower projects leads to a substantial build-up in external debt, relative to the analysis in the 2007 DSA. The policy-related LIC-DSA thresholds are breached for several of the indicators and remain breached for a longer period of time compared to the previous analysis. However, the additional projects bring strong economic dividends, boosting average real GDP growth and exports. Real GDP growth and growth of exports of goods and services are projected to average 6.2 percent and 11.2 percent respectively over 2013/14-2027/28, compared to 5.2 percent and 8.6 percent in the 2007 IMF/World Bank Joint DSA.14 Moreover, despite the large increase in the stock of debt, the addition of the new hydropower projects does not bring in substantial vulnerabilities with regards to debt servicing.

  • Furthermore, the mitigating factors that were highlighted in the 2007 assessment remain valid, namely:

  • Bhutan has a strong track record of project implementation as detailed in the 2007 DSA suggesting that the new hydropower projects are subject to low implementation risk.

  • The new hydropower projects are commercially viable. Puna I is expected to have smaller real costs of construction than Tala for a larger generation capacity, leading to a higher internal rate of return. Similarly Puna II and Mangdechu are expected to have a solid internal rate of return of about 11-14 percent.

  • Bhutan maintains close economic and political ties with India which mitigate the commercial risks of these projects. India has been both the main provider of financing for hydropower projects and the main consumer of the projects’ output. Going forward, India’s favorable economic outlook and its sizeable power deficit will continue to support the demand for Bhutan’s hydropower. This is reflected in India’s commitment to developing 10,000 MW of hydropower in Bhutan by the year 2020 and its pledge of Rs 100 billion support over the 10th Plan Period.

Bhutan: External Public and Publicly Guaranteed Debt

Bhutan: Macroeconomic Impact of Hydropower Projects

1/ Period averages are shown for years except for hydro projects commissioning.

Figure I.1.Bhutan: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009/10-2029/30 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2019/20. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

2/ The shape of the grant element of new borrowing reflects the composition of new loans. Under the standard DSA assumptions, rupee debt appears nonconcessional since its interest rate of 11 percent exceeds the 4 percent discount rate. Thus, until 2018/19, when rupee disbursements dominate external financing, the grant element seems low. However, it starts rising once the rupee financed hydropower projects are completed, and concessional loans from multilateral and bilateral development partners take stage.

Figure I.2.Bhutan: Indicators of Public Debt Under Alternative Scenarios, 2009/10-2029/301/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2019/20.

2/ Revenues are defined inclusive of grants.

Table I.1.Bhutan: External Debt Sustainability Framework, Baseline Scenario, 2006/07-2029/30 1/(In percent of GDP, unless otherwise indicated)
ActualHistoricalStandardProjections
AverageDeviation2009/10-2014/152015/16-2029/30
2006/072007/082008/092009/102010/112011/122012/132013/142014/15Average2018/192029/30Average
External debt (nominal) 1/72.063.966.668.874.984.694.1103.1110.169.721.8
Convertible currency debt23.022.629.931.338.244.347.047.444.212.119.2
Rupee debt49.041.336.637.436.740.247.155.765.957.72.6
Power sector debt56.247.742.342.943.748.757.566.475.261.53.2
Change in external debt-10.1-8.22.72.26.19.79.68.97.1-13.2-1.5
Identified net debt-creating flows-35.4-15.813.22.18.514.115.717.216.8-7.8-3.6
Non-interest current account deficit-15.7-1.37.29.913.94.311.317.219.322.321.816.0-5.6-4.0-3.1
Deficit in balance of goods and services-4.98.714.615.221.426.928.531.028.9-5.7-4.4
Exports62.951.042.644.443.343.043.142.942.854.170.6
Imports58.059.657.259.664.869.971.773.971.748.466.1
Net current transfers (negative = inflow)-9.5-9.1-7.8-8.91.8-10.8-10.2-9.6-9.3-8.9-6.91.02.00.8
o/w official-14.8-12.6-12.7-15.8-15.2-14.7-14.3-13.9-12.0-4.2-3.3
Other current account flows (negative = net inflow)-1.3-0.90.4-0.20.1-0.10.00.2-0.2-1.0-1.5
Net FDI (negative = inflow)-7.3-2.3-1.5-1.42.2-1.4-1.4-1.4-1.4-1.3-1.2-0.8-0.4-0.7
Endogenous debt dynamics 2/-12.4-12.17.5-0.7-1.4-1.7-2.2-3.8-3.7-1.40.8
Contribution from nominal interest rate1.33.43.03.22.92.82.62.42.35.21.8
Contribution from real GDP growth-9.1-6.6-3.9-3.9-4.3-4.5-4.8-6.2-6.0-6.6-1.0
Contribution from price and exchange rate changes-4.6-8.98.5
Residual (3-4) 3/25.37.6-10.60.1-2.3-4.5-6.1-8.3-9.8-5.42.1
o/w exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/68.473.681.493.3104.2108.5120.983.815.3
Convertible currency debt21.021.330.736.738.132.539.11.710.3
Rupee debt47.552.350.656.666.176.081.882.15.0
Power sector debt51.856.956.864.175.486.390.685.95.6
In percent of exports160.5165.8187.9216.8241.5253.1282.2155.021.7
In percent of government revenues278.5329.1357.9418.4476.4517.0585.5304.867.1
Debt service-to-exports ratio (in percent)3.814.215.014.313.913.213.314.113.620.05.3
PPG debt service-to-revenue ratio (in percent)10.530.426.128.426.625.526.328.728.239.216.4
Total gross financing need (Millions of U.S. dollars)-207.646.2144.8124.2230.2332.9395.1493.9521.4141.9-40.4
Non-interest current account deficit that stabilizes debt ratio-5.76.94.52.05.27.59.713.414.77.6-2.5
Key macroeconomic assumptions
Real GDP growth (in percent)13.211.75.78.12.66.66.76.46.27.16.36.68.94.55.9
GDP deflator in US dollar terms (change in percent)5.914.1-11.73.57.06.2-0.10.81.81.81.82.11.81.81.8
Effective interest rate (percent) 5/1.96.04.32.01.85.44.54.03.32.72.43.77.08.37.0
Growth of exports of G&S (US dollar terms, in percent)74.23.1-21.918.429.017.84.16.58.48.48.18.912.510.511.5
Growth of imports of G#x0026;S (US dollar terms, in percent)16.931.0-10.415.820.417.915.815.910.712.55.113.06.313.67.3
Grant element of new public sector borrowing (in percent)23.319.618.718.018.115.618.946.546.539.9
Government revenues (excluding grants, in percent of GDP)22.723.824.622.422.722.321.921.020.627.522.824.4
Aid flows (in Millions of US dollars) 7/166.0184.6202.3361.3411.8501.5547.8621.8610.0174.9276.7
o/w Grants135.8147.0135.8191.5197.0203.6214.2227.8211.7122.9179.2
o/w Concessional loans30.237.566.5169.8214.8297.9333.6394.0398.352.097.5
Grant-equivalent financing (in percent of GDP) 8/17.116.616.716.416.413.84.53.75.0
Grant-equivalent financing (in percent of external financing) 8/64.058.151.750.148.144.984.181.175.0
Memorandum items:
Nominal GDP (Millions of US dollars)1006.51282.41196.41354.21443.71548.61673.01825.61976.23253.16093.9
Nominal dollar GDP growth20.027.4-6.713.26.67.38.09.18.28.710.86.47.8
PV of PPG external debt (in Millions of US dollars)818.9996.31175.01444.21743.21980.72388.52726.3931.7
(PVt-PVt-1)/GDPt-1 (in percent)14.813.218.619.314.222.317.1-7.0-2.3-1.6
Sources: Country authorities; and staff estimates and projections.
Table I.2Bhutan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009/10-2029/30
Projections
2009/102010/112011/122012/132013/142014/152018/192029/30
PV of debt-to GDP ratio
Baseline7481931041081218415
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009/10-2029/30 1/74767877686769114
A2. New public sector loans on less favorable terms in 2009/10-2029/30 2748510311812513910938
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010/11-2011/127482951061111238516
B2. Export value growth at historical average minus one standard deviation in 2010/11-2011/12 3/74881121221261379623
B3. US dollar GDP deflator at historical average minus one standard deviation in 2010/11-2011/1274841011131171319117
B4. Net non-debt creating flows at historical average minus one standard deviation in 2010/11-2011/12 4/74871031141181309019
B5. Combination of B1-B4 using one-half standard deviation shocks74851011121161288918
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010/11 5/7411613314915517312022
PV of debt-to-exports ratio
Baseline16618821724225328215522
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009/10-2029/30 1/166176180177159155128162
A2. New public sector loans on less favorable terms in 2009/10-2029/30 216619723927329232520253
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010/11-2011/1216618821724225328215522
B2. Export value growth at historical average minus one standard deviation in 2010/11-2011/12 3/16623636139340744524745
B3. US dollar GDP deflator at historical average minus one standard deviation in 2010/11-2011/1216618821724225328215522
B4. Net non-debt creating flows at historical average minus one standard deviation in 2010/11-2011/12 4/16620024026427530316727
B5. Combination of B1-B4 using one-half standard deviation shocks16619624026527630516826
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010/11 5/16618821724225328215522
PV of debt-to-revenue ratio
Baseline32935841847651758630567
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009/10-2029/30 1/329336348350324322251501
A2. New public sector loans on less favorable terms in 2009/10-2029/30 2329375460538597674397165
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010/11-2011/1232936242748652759731168
B2. Export value growth at historical average minus one standard deviation in 2010/11-2011/12 3/329386503559599666350100
B3. US dollar GDP deflator at historical average minus one standard deviation in 2010/11-2011/1232937045351555963333073
B4. Net non-debt creating flows at historical average minus one standard deviation in 2010/11-2011/12 4/32938246452156162932984
B5. Combination of B1-B4 using one-half standard deviation shocks32937245351055161932380
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010/11 5/32951259868173983743696
Debt service-to-exports ratio
Baseline141413131414205
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009/10-2029/30 1/14131211119158
A2. New public sector loans on less favorable terms in 2009/10-2029/30 2141413141515238
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010/11-2011/12141413131414205
B2. Export value growth at historical average minus one standard deviation in 2010/11-2011/12 3/141619212221298
B3. US dollar GDP deflator at historical average minus one standard deviation in 2010/11-2011/12141413131414205
B4. Net non-debt creating flows at historical average minus one standard deviation in 2010/11-2011/12 4/141414141514206
B5. Combination of B1-B4 using one-half standard deviation shocks141414141515216
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010/11 5/141413131414205
Debt service-to-revenue ratio
Baseline2827262629283916
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009/10-2029/30 1/2825232222192925
A2. New public sector loans on less favorable terms in 2009/10-2029/30 22827262731324524
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010/11-2011/122827262729294017
B2. Export value growth at historical average minus one standard deviation in 2010/11-2011/12 3/2827273032314119
B3. US dollar GDP deflator at historical average minus one standard deviation in 2010/11-2011/122827282831314218
B4. Net non-debt creating flows at historical average minus one standard deviation in 2010/11-2011/12 4/2827262830304018
B5. Combination of B1-B4 using one-half standard deviation shocks2827262830304017
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010/11 5/2838373841405623
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/-5-5-5-5-5-5-5-5
Sources: Country authorities; and staff estimates and projections.
Table I.3.Bhutan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006/07-2029/30 (In percent of GDP, unless otherwise indicated)
ActualEst.Projections
2006/072007/082008/09AverageStandard

Deviation
2009/102010/112011/122012/132013/142014/152009/10-

2014/15

Average
2019/202029/302015/16-

2029/30

Average
Public sector debt 1/75.666.668.772.980.190.2100.7110.5121.174.632.2
o/w external debt72.063.966.668.874.984.694.1103.1110.169.721.8
Change in public sector debt-11.2-9.02.14.27.210.110.59.710.6-15.9-1.0
Identified debt-creating flows-15.1-16.72.1-4.7-2.8-4.0-5.0-7.2-6.2-14.8-0.9
Primary deficit-2.2-4.3-5.32.26.20.1-1.2-1.4-1.0-1.2-0.1-0.8-11.2-0.8-5.1
Revenue and grants36.235.335.936.536.435.434.733.531.431.325.7
of which: grants13.511.511.414.113.613.112.812.510.73.82.9
Primary (noninterest) expenditure34.031.030.736.635.234.033.732.331.220.124.9
Automatic debt dynamics-12.9-12.47.4-4.7-1.6-2.6-4.0-6.0-6.1-3.6-0.1
Contribution from interest rate/growth differential-10.9-5.7-2.1-1.9-2.7-3.2-4.1-6.0-6.1-3.6-0.2
of which: contribution from average real interest rate-0.82.21.52.31.91.61.10.70.43.71.3
of which: contribution from real GDP growth-10.1-7.9-3.6-4.3-4.6-4.8-5.2-6.7-6.6-7.4-1.4
Contribution from real exchange rate depreciation-2.0-6.89.5-2.81.10.50.10.00.1
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes3.97.70.08.810.014.215.617.016.8-1.10.0
Other Sustainability Indicators
PV of public sector debt3.52.770.677.786.598.9110.8115.9131.888.725.7
o/w external68.473.681.493.3104.2108.5120.983.815.3
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/0.43.51.66.85.34.75.15.26.0-0.23.2
PV of public sector debt-to-revenue and grants ratio (in percent)9.87.7196.5212.8237.9279.0319.4346.3420.4283.8100.0
PV of public sector debt-to-revenue ratio (in percent)15.611.4287.2347.4380.6443.6506.5552.3638.5322.7112.9
o/w external 3/278.5329.1357.9418.4476.4517.0585.5304.867.1
Debt service-to-revenue and grants ratio (in percent) 4/7.322.019.118.417.717.217.619.119.735.115.5
Debt service-to-revenue ratio (in percent) 4/11.632.527.930.128.327.328.030.430.039.917.5
Primary deficit that stabilizes the debt-to-GDP ratio9.04.7-7.4-4.1-8.4-11.5-11.5-10.9-10.74.70.2
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)13.211.75.78.12.66.66.76.46.27.16.36.68.94.55.9
Average nominal interest rate on forex debt (in percent)1.96.04.32.01.85.44.54.03.32.72.43.77.08.37.0
Average real interest rate on domestic debt (in percent)1.21.21.11.13.11.2-0.1-0.5-0.8-1.1-1.1-0.4-1.3-1.3-1.3
Real exchange rate depreciation (in percent, + indicates depreciation)-2.7-10.215.4-1.37.5-4.3
Inflation rate (GDP deflator, in percent)4.64.24.54.40.54.24.04.04.14.14.14.14.14.14.1
Growth of real primary spending (deflated by GDP deflator, in percent)0.10.00.00.00.10.30.00.00.10.00.00.10.00.10.0
Grant element of new external borrowing (in percent)23.319.618.718.018.115.618.946.546.5
Sources: Country authorities; and staff estimates and projections.
Table I.4.Bhutan: Sensitivity Analysis for Key Indicators of Public Debt 2009/10-2029/30
Projections
2009/102010/112011/122012/132013/142014/152019/202029/30
PV of Debt-to-GDP Ratio
Baseline7887991111161328926
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages788910211412113613179
A2. Primary balance is unchanged from 2009/10788810111412013612182
A3. Permanently lower GDP growth 1/78871001131191379950
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010/11-2011/1278881011141201369432
B2. Primary balance is at historical average minus one standard deviations in 2010/11-2011/12789511612713214710034
B3. Combination of B1-B2 using one half standard deviation shocks78921101211261419530
B4. One-time 30 percent real depreciation in 2010/117812113314514716412256
B5. 10 percent of GDP increase in other debt-creating flows in 2010/1178961081191241399430
PV of Debt-to-Revenue Ratio 2/
Baseline213238279319346420284100
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages213244292336369443420320
A2. Primary balance is unchanged from 2009/10213241286329359434388318
A3. Permanently lower GDP growth 1/213239282324354432315191
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010/11-2011/12213240284326355431299126
B2. Primary balance is at historical average minus one standard deviations in 2010/11-2011/12213262327367393468318130
B3. Combination of B1-B2 using one half standard deviation shocks213254311351377451304115
B4. One-time 30 percent real depreciation in 2010/11213332376417438524391220
B5. 10 percent of GDP increase in other debt-creating flows in 2010/11213263304343370445301115
Debt Service-to-Revenue Ratio 2/
Baseline1818171819203516
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages1818171820203929
A2. Primary balance is unchanged from 2009/101818171820203832
A3. Permanently lower GDP growth 1/1818171819203722
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010/11-2011/121818171819203617
B2. Primary balance is at historical average minus one standard deviations in 2010/11-2011/121818182022213819
B3. Combination of B1-B2 using one half standard deviation shocks1818182021213717
B4. One-time 30 percent real depreciation in 2010/111821242528295333
B5. 10 percent of GDP increase in other debt-creating flows in 2010/111818182020213717
Sources: Country authorities; and staff estimates and projections.

This DSA was prepared jointly by the IMF and the World Bank, in consultation with the Asian Development Bank, and in accordance with the Debt Sustainability Framework for low-income countries approved by the Executive Boards of the IMF and the IDA. The data underlying the analysis are from the Bhutanese authorities and IMF and World Bank staff estimates.

See “Debt Sustainability in Low-Income Countries: Proposals for an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/020304.htm), “Debt Sustainability in Low- Income Countries: Further Considerations on an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/091004.htm) and reference to “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries.”

Fiscal year starting July 1.

Public debt does not include state-owed enterprise debt, with the exception of hydropower projects loans and the purchase of one aircraft for state-owned Druk Air in 2004/05.

Domestic debt data compiled by the Royal Government of Bhutan include fixed rate debt relating to the purchase of one airplane for state-owned Druk Air in 2004/05, amounting to about half of total domestic debt.

Convertible currency debt mainly comprises loans from multilateral institutions, including $9½ million commercial debt extended by the IFC, making all external debt public or publicly guaranteed.

The new hydropower development policy of Bhutan outlines 10 potential hydropower projects, which would quintuple Bhutan’s power generation capacity by adding further 10,000 MW of installed capacity by 2020 out of the estimated potential capacity of 23,760 MW. However, since most of these projects are at early stages of conception, they are not included in the projections.

Puna II’s power generation capacity will be 992 MW, while Mangdechu’s will be 672 MW. The financing terms for both projects are yet to be finalized, however they are expected to be similar to Puna I’s with 30 percent grants, and 70 percent loan in Indian rupees at 11 percent interest rate from the GOI. Debt service will begin after the commissioning of the projects and will continue for 12 years. Similar to Tala and Puna I, the interest payments accumulated during construction are expected to be repaid after the project completion without being capitalized.

Although strictly speaking the financing of hydropower projects is non-concessional (i.e., below the usual 35% grant element for LICs), there is a certain level of concessionality stemming from the grant portion of financing and the exemption from payment of interest during construction. In addition, as discussed in footnote 11, a higher discount rate to calculate the present value of the rupee loans may be appropriate in view of the higher inflation and risk-free long-term interest rates in India, which would further raise the grant element of these loans.

Measures to broaden the tax base and improve administration include rationalizing sales and customs tax rates, broadening the sales tax base and eventually introducing the VAT. Further domestic revenue improvements could be achieved by harmonizing the direct income tax rates and limiting tax holidays.

The PV of external debt is calculated assuming the standard discount rate of 4 percent for both rupee and convertible currency debt. Using a discount rate for rupee denominated debt of 11.25 percent in view of the higher inflation and risk-free long-term interest rates in India, lowers the various PV of debt ratios substantially: the PV of debt-to-GDP ratio peaks at 89 percent, while the PV of debt-to-revenue ratio peaks at 430 percent in 2014/15. The PV of debt-to-exports ratio remains below the indicative threshold.

Bhutan, with an average 2006-08 Country Policy and Institutional Assessment (CPIA) index of 3.86, is currently classified as a strong performer with regard to its policies and institutions. The indicative thresholds for strong performers are 50, 200 and 300 for the PV of debt in percent of GDP, exports, and revenue respectively, and 25 and 35 for debt service in percent of exports and revenue.

Staff estimates that rupee denominated revenues will account for more than 40 percent of the non-grant fiscal revenue over the projection period.

Focusing on the average growth over a 20 year period, which appears little affected by the addition of the new hydropower projects, understates the economic impact of these projects. At commissioning, these projects will generate large spikes in real GDP growth, boost incomes and exports; however, with generation capacity fixed, the impact on growth after commissioning will be limited.

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