Challenges of external debts for Bhutan
Despite its small size and limited resources, Bhutan has made significant progress in several key development indicators, including health, poverty reduction, education, and environmental protection, while social inequality and regional disparities are being addressed. However, the country is facing new challenges, including rising external debt levels, which threaten to undermine its efforts to maintain economic stability and achieve sustainable development. In addition, the latest macroeconomic situation has deteriorated – the indirect by-product of the war in Ukraine and the COVID-19 pandemic.
Bhutan’s external debt has increased rapidly in recent years, driven by large infrastructure projects, such as the construction of hydroelectric power plants and roads. As of 2021, Bhutan’s total external debt stands at around $2.39 billion, equivalent to approximately 127% of its Gross Domestic Product (GDP). The majority of this debt is owed to India and the Asian Development Bank (ADB), with smaller amounts owed to other multilateral organisations and bilateral creditors.
The rapid increase in Bhutan’s external debt has raised concerns among policymakers and development experts. High levels of external debt can reduce a country’s ability to invest in essential social and economic services, such as education and health care, and can limit its ability to respond to economic shocks and other unexpected events. Furthermore, external debt can increase a country’s vulnerability to economic crises, particularly if it is denominated in foreign currencies and interest rates rise. The most crucial disadvantage of external debt is that it often leads to a debt cycle – the cycle of continuous borrowing, accumulating payment burden, and eventual default.
Additionally, a sharp rise in interest rates or a sudden reduction in the availability of external financing could put significant pressure on the country’s ability to meet its debt obligations. To address this, the government made efforts at reducing the budget deficit.
One of the main factors contributing to Bhutan’s rising external debt is the high cost of infrastructure development. The country’s mountainous terrain and remote location make it challenging and expensive to construct roads, bridges, and power plants. Additionally, the country’s small domestic market and limited resources have made it necessary for Bhutan to seek financing from external sources to support its infrastructure projects.
The country borrowed mostly for the construction of hydropower projects. While these power projects helped Bhutan achieve economic growth, it has also made the country vulnerable to external shocks, such as changes in regional energy demand and prices.
For example, a sharp rise in interest rates or a sudden reduction in the availability of external financing could put significant pressure on the country’s ability to meet its debt obligations. To address this, the government made efforts at reducing the budget deficit.
Despite efforts, the country is not able to diversify its economy owing to its geographic location and small domestic market. The only progress it made in recent years is the remittances by its overseas citizens.
Another challenge for Bhutan’s economy is the low level of human capital development. Despite progress in areas such as education and health, Bhutan still faces challenges in terms of workforce skills and productivity. This is largely due to the limited number of skilled workers and professionals in the country, which limits the potential for economic diversification and competitiveness.
Efforts such as creating a Debt Management Office, adopting a debt management strategy, expanding the tax base and improving tax collection efforts to increase internal revenue to reduce its reliance on external borrowings have given desired results.
Despite these efforts, Bhutan’s external debt remains a significant challenge.
To address this challenge, the government must continue to implement reforms aimed at improving its debt management practices and reducing its vulnerability to economic shocks. Bhutan must work to increase its revenue and reduce its reliance on external borrowing, while also taking steps to address the high cost of infrastructure development.
While the country’s unique approach to development and its hydropower sector have helped to drive economic growth, Bhutan requires continued efforts to improve the country’s economic fundamentals and competitiveness, while maintaining its focus on social and environmental sustainability.