This DSA was prepared jointly by the IMF and the World 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.”
Public debt does not include state-owned enterprise debt, with the exception of hydropower projects loans and the purchase of one aircraft for state-owned Druk Air in 2004/05. The other SOEs’ debt is very small.
In the whole Annex, the term rupee refers to the Indian rupee.
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.
For instance, in the 2009 DSA, growth was projected at 6½ percent in 2009/10, with external debt reaching 69 percent of GDP. Instead, provisional estimates put growth at 7½ and external debt was 3½ percentage points lower. Likewise, average GDP growth is projected to be nearly 2 percentage points over the next five years, owing to stronger construction activity and higher capital spending. The higher GDP growth projection accounts for the bulk of the slower pace of debt accumulation relative to the previous DSA.
The new hydropower development policy of Bhutan consists of ten hydropower projects, which would quintuple Bhutan’s power generation capacity. The other projects are still on paper and the exact financing arrangements are under discussion with the GOI and other partners such as Indian companies (see Box 1 of the 2011 Staff report).
Puna I’s power generation capacity is 1,200 MW. Puna II’s power generation capacity will be 990 MW, while Mangdechu’s will be 720 MW. Debt service will begin after the commissioning of the projects and will continue for 12 years. As in the cases of Tala and Puna I, the interest payments accumulated during construction are expected to be repaid following project completion, but without being capitalized.
Although the financing of hydropower projects is non-concessional (i.e., below the 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.
The unusual shape of the grant element of new disbursement in figure 1a reflects the composition of new loans. Under the standard DSA assumptions, rupee debt appears non-concessional since the interest rate of 11 percent exceeds the 4 percent discount rate. Thus, until 2016/17, when rupee disbursements dominate external financing, the grant element appears low. However, it starts rising once the rupee-financed hydropower projects are completed, and concessional loans from multilateral and bilateral development partners take stage.
Measures to broaden the tax base and improve administration include rationalizing sales and customs tax rates, broadening the sales tax base, and eventually introducing a VAT.
Bhutan’s Country Policy and Institutional Assessment (CPIA) index for 2009 was 3.89 (average of 3.86 for 2006–08), which classifies it 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. The PV of external debt is calculated assuming the standard discount rate of 4 percent for both rupee and convertible currency debt.
The strong seasonal patterns of electricity generation stem from seasonality in water levels. While such seasonal patterns generate volatility in revenues from hydropower exports within the fiscal year, annual hydropower exports can be reasonably well estimated. Hence, the effect of revenue volatility on debt sustainability is small.
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.
The projects’ internal rates of return were provided by authorities.