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.