## 1btnea2024001-print-pdf ## Source details **Canonical URL:** [1btnea2024001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1btnea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1btnea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1btnea2024001-print-pdf.pdf.json) --- ### Real sector developments and context - Social outcomes and poverty: - Extreme monetary poverty eliminated by 2022 (extreme poverty measure at US$2.15 a day (2017 PPP)). - Multidimensional poverty declined from 5.8 percent in 2017 to 2.1 percent in 2022. - National poverty line headcount poverty: 12.4 percent in 2022. - Inequality improved (Gini and income share of lowest quintile). - Bhutan graduated from Least Developed Countries (LDC) in December 2023. - Environmental commitments: - Constitution requires at least sixty percent of total land under forest cover. - Bhutan commits to remain carbon neutral; is one of 36 biodiversity hotspots. - Pandemic impact: - Output declined by about 10¼ percent in 2020. - Tourism closed for 2½ years (reopened Q4 2022); hydropower delays; employment and tourism had not fully recovered by reporting. ### Recent macroeconomic developments and vulnerabilities - Growth and labor: - Economic growth in 2021 and 2022 averaged 4.8 percent. - Growth in 2023 likely remained below 5.2 percent (2022 outturn). - Output likely exceeded pre-crisis levels in 2023; unemployment remained above pre-pandemic levels. - Large-scale emigration (notably high-skilled) and import-curbing policies dampened 2023 growth. - New administration announced an Economic Stimulus Plan (ESP) worth Ngu 15 billion (5.8 percent of GDP). - Inflation: - Averaged 3.7 percent during H1 2023; averaged 4.7 percent in H2 2023. - Medium-term inflation expected to move closer to 4 percent. - External sector and reserves: - Current account deficit widened to around 30 percent of GDP in FY2021/22 and FY2022/23. - Reserves: US$1,332 million (15.6 months of imports) in June 2021 → US$505 million (3.9 months) at end-October 2023 → $609 million (4.7 months) by end-May 2024. - Baseline projects reserves reach 6.8 months of imports only by FY2026/27. - Fiscal: - Fiscal deficit declined to 4.8 percent of GDP in FY2022/23 (previous two-year average 6.4 percent; initial budget estimate 11.3 percent). - Non-hydro debt rose to 45 percent of GDP at end-FY2022/23 (from 25.5 percent pre-pandemic). - Public sector minimum wage scale increased by 50 percent in June 2023; cost estimated at BTN 6 billion per year (2.3 percent of GDP in 2023/24). - Two-thirds of wage bill increase cost financed by exceptional crypto dividend in FY2023/24 and FY2024/25. - GST implementation pending; assumed implemented in July 2025 under staff baseline. - Undersubscription of recent T-bond auctions; increasing rates and declining maturities. - Financial sector: - Capital adequacy ratios: 17 percent (end-March 2024). - Gross NPLs (including write-offs): 8.4 percent of total loans (down from 12 percent in 2019). - Pandemic-related forbearance measures remained in place until June 2024. - Credit growth accelerated to 19 percent at end-June 2023; housing and education loans drove growth. - Liquidity pressures: strong credit growth and slower deposit growth. ### Crypto assets mining investment (Box summary and key figures) - DHI and Bitdeer operations: - DHI bitcoin mining began at a 420 MW facility in 2022. - Bitdeer began 100 MW mining in August 2023; a second Bitdeer mine (500 MW) under construction, expected mid-2025. - RMA financing and exposures: - RMA acquired dollar-denominated DHI securities totaling US$539 million between August 2020 and April 2022 (about 40 percent of pre-transaction reserves). - RMA agreed to extend DHI securities maturity by two years; securities now due 2026–2027; coupon payments at 4 percent (original bullet bond at 1.5 percent). - DHI repayments: US$ 18 million in March (year implicit in source), and a special dividend of Ngu 2.7 billion (US$ 33 million) transferred to the government. - DHI committed another special dividend of Ngu 5.3 billion (US$ 64 million) in FY2024/25. - Macroeconomic impacts and assumptions: - RMA financing entailed a large drop in reserves and prompted import restrictions to support the peg. - Baseline assumes RMA-financed operation will generate sufficient crypto asset exports to fully repay the RMA loan, finance DHI special dividends for FY2023/24 and FY2024/25, and cover its electricity expenses. - Crypto assets exports expected to taper from FY2027/28 consistent with equipment lifetime (~five years). - Risks: bitcoin price volatility and competing demands for electricity. ### Outlook (growth, fiscal, reserves, debt) - Growth: - Projected to accelerate in FY2024/25 as a large hydro project is commissioned, 13th FYP capital projects implemented, and emigration pull factors wane. - Growth and productivity expected to remain volatile. - Inflation: - Expected to converge toward 4 percent in the medium term. - Fiscal: - Fiscal deficit expected to remain elevated at around 4 percent of GDP in the medium term. - Capital investment projects for the 13th FYP and ESP financed with foreign grants; most grants and projects begin in FY2024/25 (first installment Rs. 2.5bn from India received in FY2023/24). - Fiscal deficit expected to improve in FY2025/26 with commissioning of Punatsangchhu II. - Public debt expected to increase to 130 percent of GDP by FY2028/29 due to recognition of interest earned during construction for Punatsangchhu I and II (recognition expected to raise public debt by about 17 percent of GDP on average after commission of each plant). - These higher costs expected to be fully reflected in electricity tariff and thus not represent a fiscal burden for the government. - Borrowing for Dorjilung and other energy projects will add to debt; Dorjilung construction costs excluding financial expenses assumed to amount to US$ 1.4 billion. - Non-hydro debt expected to remain well-below 50 percent of GDP. - Reserves: - Baseline projects adequate reserves (6.8 months of imports) only by FY2026/27. ### Risks (domestic, external, climate, crypto, debt) - Domestic risks: - Slippages on GST implementation. - Delays in hydro projects. - Fiscal risks from contingent liabilities in the financial sector masked by pandemic-era support. - External risks: - Volatile commodity prices (particularly fuel). - Global slowdown hindering non-hydro exports and tourism recovery. - Climate vulnerability: - Exposure to glacial-lake outburst floods; high reliance on hydroelectricity and agriculture. - Crypto-mining risks: - Bitcoin price volatility creates large upside and downside risks to reserves and fiscal flows. - External debt and CAD: - Large external debt and medium-term current account deficits remain vulnerabilities. - Upside: - Stronger-than-envisaged fiscal consolidation could accelerate rebuilding of fiscal and external buffers. ### Hydropower pipeline (start / commissioning / installed capacity) - Under construction: - Punatsangchhu I: Start 2008; Commissioning 2029; Installed Capacity 1,200 (MW) - Punatsangchhu II: Start 2010; Commissioning 2025; Installed Capacity 1,020 (MW) - Kholongchhu: Start 2016; Commissioning 2031; Installed Capacity 600 (MW) - Undergoing feasibility assessment: - Dorjilung: Start 2025; Commissioning 2032; Installed Capacity 1,125 (MW) - Commissioning of Punatsangchhu I and II will double installed generation capacity as of end-2023 to 4,664MW. ### Fiscal consolidation, revenue measures, and GST specifics - Revenue-based consolidation recommended to reduce non-hydro debt and limit total public debt rise. - GST: - Implementation cornerstone; planned for July 2025. - Procurement of Bhutan Integrated Tax System (BITS): preferred vendor identified; letter of contract intent signed June 2024; vendor work expected mid-September; around ten months of preparation before launch targeted for July 2025. - Additional permanent revenue measures recommended totaling around 1 percent of GDP over the 13th FYP. - Possible tax policy measures (Medium-Term Yield, percent of GDP): - Reform personal income tax: 0.8 - Introduce a minimum alternative tax for unincorporated businesses and companies: 0.2 - 0.4 - Raise tax deducted at the source on non-residents: 0.5 - Tax telecom services with sales tax and GST: 0.3 - 0.4 - Recent tax reforms: - Property Tax Act of 2022 expected to raise 0.2 percent of GDP. ### Expenditures, wage bill, and public financial management - Attrition and pay reform: - Civil servant attrition: 1,722 resigned voluntary in first five months of 2023; additional two thousand resignations between June and December 2023. - Royal Civil Service Commission recruited 3,332 civil servants in 2023 (Education 1,607; Health care 549). - Sixth Pay Commission: uniform increase of 50 percent of minimum pay scale adopted; professional allowances increased in health sector; annual leave increased from 12 to 21 days. - Fiscal cost of wage increase: BTN 6 billion per year (2.3 percent of GDP in 2023/24); two-thirds financed by DHI exceptional dividend on average in FY2023/24 and FY2024/25. - Public financial management reforms: - New Unified Chart of Accounts consistent with GFSM 2014 developed; IT upgrades required for full implementation. - Rolling Medium-Term Budgetary Framework recommended. - Transition to a Treasury Single Account ongoing. - Compilation and dissemination of fiscal accounts under GFSM 2014 and stronger SOE transparency recommended. - 13th FYP capital expenditure: - Ngu 245bn over FY2024/25–FY2028/29; 51 percent financed by foreign grants (including Ngu 85bn from India). - ESP: Ngu 15bn (around 5 percent of GDP) to boost agriculture, high-value exports, skilling, and tourism. - Capital expenditure composition: Roads, irrigation, and water supply 33%; Education 12%; Health 9%; Workforce skilling 4%; Digital transformation 4%; Other 38%. ### Debt coverage, dynamics, and DSA findings - Debt coverage: - DSA covers public and publicly-guaranteed (PPG) debt, non-financial public sector and central bank; includes non-guaranteed domestic SOE debt (expansion relative to 2022). - Public debt levels and composition (end-June 2023): - Public debt: 116.1 percent of GDP. - External debt accounted for 89 percent of total debt. - Hydropower debt comprised 69 percent of external debt. - Domestic debt: 12.8 percent of GDP (end-June 2023). - Creditor composition: 61 percent bilateral; 27 percent multilateral. - Baseline DSA assumptions and projections: - Real GDP growth: 5.0 (2021/2022); 5.2 (2023/2024); MT (2025-2029) 6.3; LT (2030-2044) 5.8 (percent). - General government fiscal deficit: 4.6 percent of GDP in FY2023/24 (projected). - Primary balance long-run expected around 0.2 percent of GDP. - CAD: 33.1 percent of GDP in FY2022/23 → 16.3 percent in FY2023/24 → projected 30.6 percent in FY2024/25; medium-term average 16.5 percent; decline to 10.4 percent by 2028/29; long-term average 4.4 percent. - Non-hydro external debt and indicators under baseline and stress tests summarized in DSA tables (see reported exact indicator values in source). - DSA classification: - DSA assesses Bhutan at "moderate risk of external and overall debt distress". - PV of PPG external debt-to-GDP: 93.1 (2023); 92.0 (2024); 88.3 (2025); 100.5 (2026); 101.3 (2027); 97.2 (2028); 104.1 (2029); 66.3 (2034); 22.2 (2044). - External debt-to-GDP trajectory example: 106.4 (FY2022/23); about 120 percent in the medium term (by FY2028/29); 79.7 by 2033/34; 37.2 by 2043/44. - Stress tests show breaches under adverse scenarios, particularly export shocks and combinations of shocks; excluding intergovernmental (IG) hydro debt materially improves stress-test outcomes. ### External sector, trade linkages, and exchange rate - Trade and financing links with India: - India is destination of 86 percent of Bhutan’s exports and source of 73 percent of imports. - Bulk of external debt denominated in INR: 68 percent of GDP and 61 percent of total debt. - Majority of debt service in INR: 2 percent of GDP and 51 of total debt service payments. - India is largest FDI source: 51 percent. - External position and reserves: - Staff assessment: current account gap 12 percent implying REER overvaluation of 48 percent (staff estimate). - Negative NIIP elevated at more than 130 percent of GDP as of end-June 2023. - Reserves at 4.8 months of imports as of end-May 2024 below adequate level (~6.8 months). - Exchange restrictions and peg: - Peg to the Indian rupee serves as nominal anchor. - Short-term import restrictions (vehicles, lending bans, remittance incentives) slowed reserve fall but are temporary; import restrictions on vehicles scheduled to end August 2024. - Suggested prudential measures: limits on net foreign exchange open position; introduce foreign exchange liquidity coverage ratio. ### Monetary policy, liquidity management, and financial sector recommendations - Monetary policy stance and recommended actions: - Pandemic-era accommodative stance yet to be fully unwound. - CRR raised by 100 basis points to 8 percent in October 2022 (below long-term 10 percent). - Capital Conservation Buffer reinstated December 2022. - Staff recommends tightening monetary policy in coordination with fiscal consolidation; raise CRR to pre-pandemic level. - Domestic Liquidity Management Framework (DLMF): - Liquidity in 2024Q1 below pre-pandemic levels; operationalization stymied by persistent excess liquidity and high variation across banks. - Staff proposes adding a monetary policy operation function, with a starting interest rate corridor of +/- 150 basis points around a policy rate of 6.5 percent. - Proposed corridor is above informal interbank rate (3-5 percent at 90-180 day tenors) and 90-day T-bill rate of 4.24 percent (last auction March 2024). - Publish a regular issuance calendar for government securities. - Financial sector vulnerabilities: - Bank return on assets around one percent. - State-owned banks less profitable and hold over half of system assets. - Housing sector exposure >30 percent of outstanding loans (up from 25 percent in 2019); 10 percent of housing loans under deferment. - Tourism loans (12 percent of total credit) largely under deferment. - Staff recommendations: normalize policies, reverse pandemic-era relaxation for housing loans, increase risk weights for hotels/tourism/housing, continue AML/CFT progress, IFRS provisioning, pilot Basel III LCR, roll out credit risk scoring model in FY2024/25. ### Structural reforms and diversification - Employment and emigration: - Emigration driving attrition; Australia student visas: 13,503 granted to Bhutanese Jan–Oct 2023 (67 percent increase vs whole 2022; 2022 figure 331 percent higher than 2021). - Reforms to create private sector jobs for high-skilled workers recommended: improve business environment, encourage FDI, strengthen human capital, active labor market policies. - FDI and policy changes: - New FDI policy to be introduced July 2024 relaxing foreign currency access, local employment requirements, and caps on foreign ownership in some sectors. - Tourism strategy: - Target "high value, low volume" tourism. - Sustainable Development Fee (SDF) changes: US$65 → US$200 (reopening) → lowered to US$100 in September 2023; Indian tourists charged 1,200 Ngu per day. - Druk Air fares noted as implicit tax on tourism for foreigners. - Gelephu Mindfulness City (GMC): - Project spans 2,600 square km; construction envisaged by April 2025 with finalization 2028–29. - Staff caution: ring-fence project and secure equity/debt with no liability for Bhutan to limit fiscal risks. ### Key policy recommendations (summary) - Fiscal: - Undertake robust, revenue-based fiscal consolidation. - Implement GST by July 2025 and complement with additional permanent revenue measures amounting to around 1 percent of GDP over the 13th FYP. - Improve tax administration (Large Taxpayers Unit, tax debt management). - Restrain and better target the wage bill; avoid across-the-board increases. - Publish periodic government securities issuance calendar; strengthen public financial management and SOE transparency. - Monetary and external: - Tighten monetary policy to support peg and rebuild external buffers; raise CRR to pre-pandemic level. - Operationalize DLMF with market-based liquidity operations and policy rate corridor (staff suggested policy rate 6.5 percent with +/- 150 basis points). - Ease temporary import restrictions as buffers are rebuilt. - Financial sector and prudential: - Normalize financial sector policies; reverse pandemic-era relaxation for housing loans. - Monitor sectoral credit concentrations; consider higher risk weights for hotels, tourism, and housing. - Continue AML/CFT, IFRS provisioning, risk-based supervision, and credit risk scoring rollout. - Structural reforms: - Generate high-quality jobs and diversify the economy. - Improve business environment, governance, transparency, and attract FDI. *Source: IMF country report content provided in the supplied document excerpt.* ### 1. Real Sector Developments ____________________________________________________________________________ 27 ### 1. Real Sector Developments ### Context - Bhutan’s social conditions improved significantly during the last decade: sustained growth increased gross national income per capita and—by 2022—eliminated extreme monetary poverty (extreme poverty measure at US$2.15 a day (2017 PPP)). - Multidimensional poverty declined from 5.8 percent of the population in 2017 to 2.1 percent in 2022. The national poverty line headcount poverty stood at 12.4 percent in 2022. - Inequality declined, with improvements in both the Gini coefficient and the income share held by the lowest quintile. - The UN assessed that Bhutan met thresholds for the Human Assets Index and national income per capita to graduate from Least Developed Countries (LDC) category in 2015 and 2018, and graduated Bhutan in December 2023. - The 2008 Constitution requires a minimum of sixty percent of Bhutan's total land maintained under forest cover for all time; Bhutan commits to remain carbon neutral and is one of 36 biodiversity hotspots. - The pandemic caused output to decline by about 10¼ percent in 2020. Tourism experienced a 2½ year closure of borders (reopening in Q4 2022) and hydropower projects suffered important delays; employment and tourism had not fully recovered to pre-crisis levels by the time of reporting. ### Recent macroeconomic developments and vulnerabilities - Growth: - Economic growth in 2021 and 2022 averaged 4.8 percent, driven by a strong recovery in investment that exceeded pre-pandemic levels in 2022. - Growth in 2023 likely remained below the 5.2 percent achieved in 2022. - Output likely exceeded pre-crisis levels in 2023 as employment improved, though unemployment remained above pre-pandemic levels partly due to higher labor force participation. - Factors dampening 2023 growth: large-scale emigration (particularly of high-skilled working age people), import-curbing policies, fiscal restraint in FY2022/23, and likely low capital spending execution in H2 2023. - Public sector wage increases implemented in June 2023 boosted demand and placed pressure on prices. - Inflation: - Averaged 3.7 percent during H1 2023; accelerated to an average of 4.7 percent in H2 2023 driven by domestic components while imported inflation remained low. - External sector and reserves: - Crypto mining operations (DHI and later Bitdeer) and associated imports, plus lower electricity exports, exerted large balance of payments pressures. - Current account deficit widened to around 30 percent of GDP in FY2021/22 and FY2022/23. - Reserves fell from US$1,332 million (15.6 months of imports) in June 2021 to US$505 million (3.9 months of imports) at end-October 2023; recovered to $609 million (4.7 months of imports) by end-May 2024 due to tourism recovery, non-hydro exports, and a jump in inward remittances. - Fiscal: - Fiscal deficit declined to 4.8 percent of GDP in FY2022/23 from an average of 6.4 percent of GDP in the previous two years (and compared to an initial budget estimate of 11.3 percent of GDP). - Non-hydro debt rose to 45 percent of GDP at end-FY2022/23, up from 25.5 percent of GDP before the pandemic. - A 50-percent increase in the minimum wage scale for public sector workers was announced in June 2023, with additional increases for specific groups; two-thirds of the cost of the wage bill increase will be financed by an exceptional crypto dividend in FY2023/24 and FY2024/25. - Implementation of the Goods and Services Tax (GST) remains pending, largely due to setbacks in procurement of the new IT system and attrition in the Department of Revenue and Customs. - Undersubscription of the last three T-bond auctions, with increasing rates and declining maturities, reflect lower domestic liquidity. - Financial sector: - At end-March 2024, capital adequacy ratios stood at 17 percent. - Gross non-performing loans (NPLs) including write-offs declined to 8.4 percent of total loans (from 12 percent in 2019). - Pandemic-related forbearance measures remained in place until June 2024, masking financial sector risks. - Credit growth accelerated to 19 percent at end-June 2023, driven by housing and education loans; credit concentration risks to large borrowers and the housing sector intensified. - Strong credit growth and slower deposit growth have reduced liquidity. ### Political and policy developments - A new administration took office in late January 2024: People’s Democratic Party leader Tshering Tobgay began his second term as Prime Minister after winning national assembly elections on January 9th. His platform emphasized accelerating energy projects, attracting FDI, improving the business environment, boosting youth employment, and an Economic Stimulus Plan (ESP) worth Ngu 15 billion (5.8 percent of GDP). - An ambitious 13th Five Year Plan (FYP) will run from FY2024/25 to FY2028/29, centered on Prosperity, People, and Progress with a long-term goal of becoming a high-income nation by 2035. India announced support for the 13th FYP in the amount of Ngu 85bn. ### Box 1 — Bhutan’s Crypto Assets Mining Investment (summary of key points) - DHI began mining bitcoin at a 420 MW facility in 2022; Bitdeer (Singapore-based) began 100 MW mining in August 2023 and a second Bitdeer mine (500 MW) is under construction, expected to begin operations in mid-2025. - RMA financed DHI’s initial investment by acquiring dollar-denominated securities issued by DHI totaling US$539 million between August 2020 and April 2022. - These securities amounted to about 40 percent of the pre-transaction level of reserves and were publicly disclosed by DHI only in April 2023; the RMA loan placed significant pressure on reserves and raises governance concerns. - DHI made repayments to the RMA in March 2024 and provided a special dividend of Ngu 2.7 billion (US$33 million) to the government; they committed another special dividend of Ngu 5.3 billion (US$64 million) in FY2024/25. - The RMA agreed to extend the maturity of outstanding DHI securities by two years; securities are now due to be repaid between 2026 and 2027. The extension entails coupon payments at a 4 percent rate (original bullet bond at 1.5 percent). - Under staff’s baseline scenario, reserves reach an adequate level (6.8 months of imports) only by FY2026/27. - The macroeconomic impact is significant: large drop in reserves, import restrictions to support the peg, uncertain returns linked to bitcoin price volatility, and competing demands for electricity (domestic electrification, production diversification, exports). Authorities prioritize domestic consumption for households and other industries through pricing policies. ### Outlook - Growth: - Projected to accelerate in FY2024/25 as a large hydro project is commissioned, 13th FYP capital projects are implemented, and emigration pull factors wind down; capital spending is expected to be import-intensive. - Growth and productivity are expected to remain volatile. - Inflation: - Expected to move closer to 4 percent in the medium term, supported by the peg and aligning with the midpoint of India’s inflation target. - Fiscal: - Fiscal deficit expected to remain elevated at around 4 percent of GDP in the medium term. - Two-thirds of the cost of the wage bill increase financed by exceptional crypto dividend in FY2023/24 and FY2024/25; recovery in tourism expected to provide additional SDF revenues. - Capital investment projects for the 13th FYP and ESP financed with foreign grants will not impact the deficit; most grants and associated investment projects will begin in FY2024/25 (a first installment of Rs. 2.5bn was already received from India as part of ESP financing in FY2023/24). - Fiscal deficit expected to improve in FY2025/26 helped by commissioning of the large hydro-project Punatsangchhu II, which will deliver especially high dividends in its first year of operation. - GST is assumed to be implemented in July 2025. - Public debt is expected to increase to 130 percent of GDP by FY2028/29 as commissioning of Punatsangchhu I and II leads to recognition of interest earned during their construction; recognition of interest earned during construction is expected to raise public debt by about 17 percent of GDP on average after the commission of each plant. - These higher costs would be fully reflected in the electricity tariff and thus not represent a fiscal burden for the government. - Borrowing for the Dorjilung hydropower project and other smaller energy projects will contribute to debt accumulation; Dorjilung construction costs excluding financial expenses are assumed to amount to US$ 1.4 billion (source provided in original text). - Non-hydro debt is expected to remain well-below 50 percent of GDP. - Reserves: - Baseline scenario projects adequate reserve rebuild only by FY2026/27 (6.8 months of imports). ### Risks - Overall uncertainty is elevated with risks tilted to the downside. - Domestic risks: - Slippages on GST implementation. - Delays in hydro projects. - Fiscal risks from potential materialization of contingent liabilities in the financial sector, currently masked by pandemic-era support measures. - External risks: - Volatile commodity prices—particularly of fuel. - A global slowdown that could hinder non-hydro exports and tourism recovery. - Climate vulnerability: - Bhutan is vulnerable to climate change given the importance of hydroelectricity generation and agriculture, including risks of glacial-lake outburst floods. - Crypto-mining operations: - Entail significant upside and downside risks because of bitcoin price volatility. - External debt and current account deficits: - Large external debt and medium-term current account deficits, while financing growth-enhancing investments with development partner support, remain a source of vulnerability. - Upside: - Stronger-than-envisaged fiscal consolidation would accelerate the rebuilding of fiscal and external buffers. *Source: IMF country report content provided in the supplied document excerpt.* ### 16. Bhutan’s recent graduation from LDC status is not expected to have a material impact ### 16. Bhutan’s recent graduation from LDC status is not expected to have a material impact ### Short-term impact of LDC graduation and grants - During the 12th FYP, Bhutan received an average of 6.7 percent of GDP in foreign budgetary grants per year, with 71 percent of them coming from India. - Neither India nor other development partners use LDC status as an automatic trigger for grants to Bhutan; no immediate impact on grants is expected. - India has pledged what amounts to a large increase in their support for the 13th FYP. - Over the long term, grants are expected to decline as Bhutan organically advances in its development process. ### Macroeconomic outlook and risks - Authorities and staff expect the economy to accelerate as large hydro-projects are commissioned and investments materialize; authorities envisaged somewhat faster growth in the medium-term. - Agreed risks: global slowdown, volatile commodity prices, and climate change. - Ex-ante Impact Assessment findings referenced: United Nations Committee for Development Policy, 2018. ### Policy discussions and recommendations (peg to INR) - The peg to the Indian rupee has served as a nominal anchor given close trade linkages with India. - To support the peg, policies should address external and domestic imbalances and gradually rebuild policy buffers. - Recommended fiscal measures: - Faster fiscal consolidation via revenue mobilization and spending restraint. - Implement the GST by July 2025 as currently envisaged. - Improve tax administration. - Restrain the wage bill. - Improve spending efficiency. - Recommended monetary policy stance: - Tighten monetary policy to support fiscal consolidation and rebuild external buffers. - Structural reforms: - Generate high-quality jobs and diversify the economy. - Improve business environment, governance, and transparency in the public sector. ### Fiscal consolidation specifics - A revenue-based fiscal consolidation would allow a decline in non-hydro debt and limit the increase in total public debt. - GST implementation is a cornerstone; should be complemented with additional permanent revenue measures amounting to around 1 percent of GDP over the 13th FYP. - A downward trajectory for non-hydro debt could serve as a fiscal anchor over the medium term. - Supported by tighter monetary policy, easing import restrictions could be allowed while contributing to a faster buildup of reserves. ### External sector policies and key external statistics - India is the destination of 86 percent of Bhutan’s exports and is the source of 73 percent of Bhutan’s imports. - The bulk of external debt is denominated in INR: 68 percent of GDP and 61 percent of total debt; most of debt service is in INR: 2 percent of GDP and 51 of total debt service payments. - India is the largest source of FDI: 51 percent. - Staff assessment of external position: - Current account gap is 12 percent, implying an exchange rate overvaluation of 48 percent. - Negative NIIP is elevated at more than 130 percent of GDP as of end-June 2023. - Reserves at 4.8 months of imports as of end-May 2024 are below the adequate level, estimated to be around 6.8 months of imports. - Short-term measures such as import restrictions on vehicles, lending bans, and incentives on remittances have temporarily slowed the fall in reserves but do not address underlying imbalances. - Import restrictions on vehicles are scheduled to end in August 2024. - Remittance incentive history: 1 percent in May 2021; raised to 2 percent in July 2022; 10 percent in June 2023; expired at end December; reinstated for February 2024; no longer in place. - Commercial banks: can hold foreign currency up to a limit, beyond which they are required to sell it to the RMA; lending is conducted only in Ngultrum. - Suggested prudential measures: limits on net foreign exchange open position; introducing a foreign exchange liquidity coverage ratio. ### External financing needs and sources (USD million) — table highlights (Act./Proj.) - A. External financing needs: 934; 835; 1,408; 1,095; 852; 1,255; 1,135 - Current account deficit (net of errors/omissions): 657; 559; 1,130; 799; 532; 797; 728 - Loan amortization: 77; 76; 78; 96; 121; 212; 582; 07 - Repayment of swap with RBI: 200; 200; 200; 200; 200; 200; 200 - B. External financing sources: 708; 874; 1,410; 1,462; 1,505; 1,404; 1,265 - Grants: 120; 98; 28; 93; 82; 36; 73; 10; 15; 2 - Foreign direct investment, net: 121; 68; 49; 116; 21; 28; 31 - Medium- and long-term loan disbursements: 218; 235; 259; 678; 712; 639; 629 - Swap with RBI: 200; 200; 200; 200; 200; 200; 200 - C. Change in reserves (B-A): -227; 392; 367; 653; 150; 130 - Reserves (eop): 574; 606; 604; 969; 1,616; 1,759; 1,879 - Source: IMF staff projections. ### Hydropower pipeline (start/commissioning/installed capacity) - Under construction: - Punatsangchhu I: Start of Construction 2008; Commissioning 2029; Installed Capacity (MW) 1,200 - Punatsangchhu II: Start of Construction 2010; Commissioning 2025; Installed Capacity (MW) 1,020 - Kholongchhu: Start of Construction 2016; Commissioning 2031; Installed Capacity (MW) 600 - Undergoing feasibility assessment: - Dorjilung: Start of Construction 2025; Commissioning 2032; Installed Capacity (MW) 1,125 - New hydro plants, recovery in tourism crypto assets exports, and development partner support are expected to help reserves return to adequate levels over the medium term. - Current account deficit will remain elevated due to project-related imports, including hydropower, financed partly by development partners. ### Crypto assets operations: risks and assumptions - Baseline assumption: RMA-financed operation will generate sufficient crypto asset exports to fully repay the RMA loan, finance the DHI special dividend for the FY2023/24 and FY2024/25 budgets and cover its electricity expenses. - Crypto assets exports are expected to taper down from FY2027/28 onwards, in line with the expected lifetime of the mining equipment. - Authorities envisage future crypto assets mining investments funded through FDI. - DHI actions noted: DHI made a repayment to the RMA of US$ 18 million in March, and Nu 2.7 billion in dividends have been transferred to the budget. - The expected lifetime of crypto assets mining equipment is approximately five years. - Risks and recommended strategies: - Ensure DHI’s crypto assets investment and holding strategy has an appropriate risk and return profile for Bhutan. - Minimize effects of crypto price volatility on the domestic economy (avoid boom-and-bust cycles translating into volatile recurrent government spending). - Mitigate fiscal risks. - Ensure benefits are shared equitably across generations. ### Authorities’ views on external buffers and crypto assets - Authorities agreed external buffers have been eroded; import restrictions are temporary and will be lifted as scheduled. - RMA has managed foreign currency demand nimbly. - Authorities view crypto assets investment as strategic to exploit comparative advantage and diversify the economy; envisaged expertise can be used in other industries (e.g., data centers). - Holding strategy includes measures to minimize risk of default on outstanding DHI securities. ### Fiscal policy assessment and debt - Gradual but sustained fiscal consolidation is appropriate. - Staff assesses the risk of debt distress as moderate, unchanged from the 2022 AIV DSA. - Public debt is high but has declined slightly more than envisaged in the past DSA. - FDI-like nature of Bhutan’s hydro debt mitigates debt sustainability risks. - Recognition of interest earned during construction for intergovernmental hydro projects will significantly worsen debt dynamics by leading to two one-off increases over the medium term. - Limited fiscal space remains to absorb significant negative shocks. - A credible medium-term consolidation plan should put non-hydro debt on a declining path and rebuild fiscal buffers. - Staff estimates: - Measures outlined would yield a deficit of 3.8 percent of GDP on average during the 13th FYP, higher than the authorities’ target of 3 percent of GDP. - Additional permanent tax policy measures amounting to around 1 percent of GDP would be needed to achieve the 13th FYP target, and would entail a deficit of about 3 percent of GDP in FY2027/28. ### Revenue mobilization and GST - Recent tax policy efforts (property and sales tax reforms in 2022) expected to have limited impact. - Property Tax Act of 2022 expected to raise 0.2 percent of GDP. - GST implementation is essential and currently planned for July 2025. - Procurement of Bhutan Integrated Tax System (BITS): preferred vendor identified; letter of contract intent signed in June 2024; vendor work expected to commence in mid-September; around ten months of preparation needed before launch targeted for July 2025. - Authorities requested IMF CD to streamline exemptions in GST and the schedule for the EET, aiming to submit a reform bill for Parliament consideration in the winter session. - Revenue administration improvements: establish a Large Taxpayers Unit; implement a tax debt management framework; develop risk-based compliance improvement plans. - IMF CD support includes a field-based long-term expert. - Medium-Term Revenue Strategy recently completed. ### Possible tax policy measures (Medium-Term Yield, in percent of GDP) - Reform personal income tax: 0.8 - Introduce a minimum alternative tax for unincorporated businesses and companies: 0.2 - 0.4 - Raise tax deducted at the source on non-residents: 0.5 - Tax telecom services with sales tax and GST: 0.3 - 0.4 ### Expenditure policy and wage bill - Attrition among civil servants was 17.2 percent in 2023, almost six times higher than pre-pandemic levels. - Authorities granted a 50 percent increase in the minimum pay scale for all public servants with additional targeted increases in the health sector. - No across-the-board wage increases had been granted since 2019 prior to this move. - Recommendations to manage wage bill: - Avoid across-the-board wage increases. - Grant targeted increases to critical positions only. - Carefully consider which positions need filling and which could be discontinued; streamline civil service. - Deploy flexible hiring strategies for critical positions in health care and education. - Assess adequacy of the current wage setting mechanism (e.g., convene the Pay Commission at regular intervals). - Consider reforms to strengthen transparency and enhance targeting of salary increases; enhance public servants’ evaluation. ### Capital investment, 13th FYP priorities, and public financial management - 13th FYP envisages capital expenditure of Ngu 245bn between FY2024/25 and FY2028/29, 51 percent financed by foreign grants, including Ngu 85bn from India. - India-financed ESP: Ngu 15bn (equivalent to around 5 percent of GDP) to reinvigorate the economy via agriculture productivity, high-value exports by cottage and small industries, skilling workers, and tourism quality improvements. - ESP channels: primarily through the financial system as loans, some acquisition of equipment, capital grants, and subsidies. - To preserve financial stability, consider appropriate financial instruments and mechanisms to facilitate aggregation and strengthen commercial value chains in agribusinesses; avoid past directed subsidized lending that led to high NPLs. - Stronger public financial management measures: - New Unified Chart of Accounts consistent with GFSM 2014 developed. - Full implementation requires IT upgrades targeted over the medium term. - Introduction of a rolling MTBF recommended to enhance coordination and reduce volatility in capital spending. - Transition to a Treasury Single Account is ongoing with consolidation of accounts held by budget entities to improve cash management. - Compilation and dissemination of fiscal accounts under GFSM 2014 for central and general government, and stronger transparency on SOE operations, are essential. - SOE operations should be subject to the same disclosure requirements that apply to publicly-listed companies. - Capital expenditure composition in the 13th FYP: - Roads, irrigation, and water supply: 33% - Education: 12% - Health: 9% - Workforce skilling: 4% - Digital transformation: 4% - Other: 38% *INTERNATIONAL MONETARY FUND* ### 29. Staff highlighted that domestic debt management could be enhanced. Public debt ### 1btnea2024001-print-pdf - 29. Staff highlighted that domestic debt management could be enhanced. Public debt ### Public debt and domestic debt management - Public debt declined in the post-pandemic recovery, driven especially by hydro debt repayments; however, non-hydro debt increased, fueled by sizable fiscal deficits. - Domestic debt, which before the pandemic was negligible, has become quite significant at 12.8 percent of GDP (end-June 2023). - In 2023, the authorities issued a new debt management policy which captures central government domestic debt as part of their key debt anchor; staff note broader institutional coverage would have been advisable. - Staff recommendations: - Enhance domestic debt management, particularly by releasing a periodic calendar of issuances of T-bills and T-bonds. - Maintain concessional external debt as the core source of investment financing. - Explore alternative financing mechanisms for new large hydropower projects. ### Authorities’ views on fiscal policy and debt - Authorities agreed on the importance of enacting a revenue-based fiscal consolidation during the next five years, including by implementing additional tax policy measures. - They committed to implement GST by July 2025 and are exploring additional tax policy options. - They noted progress in revenue administration reforms despite limited staff. - They considered the 2023 Pay Revision essential to curb attrition and preserve public service delivery, while agreeing that cautious management of the wage bill going forward will be important. - They concurred with staff’s assessment of a moderate risk of debt distress, but highlighted the limited risks associated to hydropower projects and the need for Bhutan to quickly capitalize on this sector. - Staff suggested strengthening budget reports’ fiscal risk discussion by quantifying fiscal risks related to SOEs and transparently reporting and quantifying DHI liabilities to the RMA. ### Monetary policy stance and recommendations - The pandemic-era accommodative monetary stance is yet to be fully unwound. - The RMA’s Cash Reserve Ratio (CRR) was raised by 100 basis points to 8 percent in October 2022, however it is still below its long-term level of 10 percent. - The Capital Conservation Buffer was reinstated in December 2022, nine months earlier than originally envisaged. - To address pockets of vulnerabilities, the RMA instated a ban on lending for new housing and hotel construction, tightening financial conditions; credit growth slowed in the first quarter of 2024. - Staff recommendation: Monetary policy needs to be tightened, in coordination with fiscal consolidation, to support the peg. The CRR should be raised to its pre-pandemic level to help address balance-of-payments and inflationary pressures. ### Domestic Liquidity Management Framework (DLMF) and money markets - Liquidity in 2024Q1 was below pre-pandemic levels; some banks experienced episodes of liquidity stress in mid-2023. - Operationalization of the DLMF has been stymied by persistent excess liquidity, high variations in liquidity holdings amongst banks, and challenges in forecasting liquidity. - Staff recommendations and proposals: - Continue ongoing efforts, with CD support, to operationalize the DLMF. - Expand coverage of the TSA over the medium term to smooth money market functioning and better gauge government cash position and banking sector liquidity. - Consider increasing deposit rates or raising long-term funding (e.g., corporate bond issuance) if liquidity pressures persist. - Reform the DLMF to support RMA’s monetary policy objective by adding a monetary policy operation function to weekly liquidity management; RMA would match bids/offers and inject or absorb liquidity at announced policy rates. - Staff suggested a starting interest rate corridor of +/- 150 basis points around a policy rate of 6.5 percent. - The corridor is above the informal interbank rate of between 3-5 percent (at tenors of 90-180 days) and the 90-day T-bill rate of 4.24 percent (last auction in March 2024). - The proposed policy rate is in line with India’s policy rate and, with inflation at about 5 percent, implies a monetary policy tightening with a positive real rate. - Staff recommended publishing a regular issuance calendar for government securities specifying tenors and volumes of instruments to be issued to help banks manage liquidity and support domestic debt market development. - Contextual statistic: Part of the liquidity stress in mid-2023 was due to an uptick in lending to the public sector, which reached 16 percent of total assets, from 4 percent in January 2020. ### Financial sector vulnerabilities and policy recommendations - Bank profitability has increased but remains low compared to peers, with a return on assets of around one percent. - State-owned banks are less profitable compared to private counterparts; state-owned banks represent over half of total banking system assets. - NPLs are now at historical lows reflecting reclassification of selected NPLs and support measures; nearly all hotel and tourism loans, which are 12 percent of total credit outstanding, are currently under deferment. - Credit concentration risks have intensified: the housing sector accounts for more than 30 percent of total outstanding loans from 25 percent in 2019. Ten percent of housing loans are under deferment and are at risk of deteriorating into NPLs. - Authorities have introduced new guidelines covering loan restructuring, reclassification of NPLs, tightening credit report requirements, loan origination and monitoring, and directives to reduce evergreening. - Staff recommendations: - Continue to normalize financial sector policies and address remaining vulnerabilities. - Reverse pandemic-era relaxation of prudential regulations related to housing loans. - Closely monitor loans to hotels, tourism and housing sectors; consider increasing risk weights to these higher risk sectors (RMA is considering this). - Continue progress on AML/CFT framework and effectiveness, updating the National ML/TF Risk Assessment with CD support. - Continue efforts on risk-based supervision, IFRS loan loss provisioning, reviewing connected lending guidelines, piloting the Basel III LCR Framework, and rolling out the credit risk scoring model in FY2024/25. ### Structural reforms, diversification, and tourism - To address emigration, reforms are needed to foster private sector job creation for high-skilled workers: improve business environment, encourage FDI, strengthen human capital, and improve active labor market policies. - The new FDI policy, to be introduced in July 2024, relaxes some restrictions including access to foreign currency, local employment requirements, and caps on foreign ownership in some sectors; it expands the sectors under the priority list. - Export concentration: electricity generation and energy-intensive industries account for about 70 percent of total exports; exports to India account for 86 percent of the total. - Tourism: - Bhutan’s strategy targets “high value, low volume” tourism. - The country remained closed to tourism until late Sep-2022. - The Sustainable Development Fee (SDF) increased from US$65 per day to US$200 per day on reopening; following slow recovery and discounts, the SDF was lowered to US$100 per day in September 2023. The recovery in tourism accelerated after the lower fee was instated. - Tourists from India are charged a significantly lower fee at 1,200 Ngu per day. - Druk Air, a SOE, charges significantly higher fares to foreigners relative to those available for locals, which staff note is an implicit tax on tourism and a cross subsidy. ### Governance, statistics, and SOE transparency - Staff noted scope to strengthen governance in the public sector, including RMA’s governance framework: improve transparency on roles, make explicit in the RMA Act that the audit committee will be composed of non-executives, exclude government officials (other than MOF representative) from non-executive RMA Board positions, and introduce stricter limits on RMA lending to the government (loans at market rates and only to smooth fiscal fluctuations). - Staff highlighted the need for better reporting on SOE operations and crypto-mining activities; forthcoming audited statements of crypto-mining operations are a step in the right direction. - Recent statistical improvements include rebasing of national accounts, the CPI and the PPI, improved frequency of the labor force survey (annual to quarterly), and forthcoming quarterly national accounts. Lack of reporting of holdings and sales of crypto assets could lead to mismeasurement in the national accounts. ### Box: Gelephu Mindfulness City (GMC) — summary and fiscal risk considerations - GMC project aims to build a new city spanning 2,600 square km at the border with India to create a high-end market for Bhutanese goods and services and attract high wealth individuals and global entrepreneurs. - Project features and timeline: - Envisions an economic center integrating equitable economic growth, cultural preservation, environmental sustainability, and good governance. - His Majesty the King is personally leading the project and efforts to attract large amounts of foreign equity and debt financing. - Construction is envisaged by April 2025 with works finalizing in 2028-29. - Staff caution: - Ring-fencing the project will be key to limit downside fiscal risks for Bhutan. - Securing equity and debt financing with no liability for Bhutan is critical given limited fiscal space and other pressing financial needs. *Source: IMF staff report excerpt.* ### 47. Growth is expected to accelerate over the medium term, boosted by hydro-projects ### Growth is expected to accelerate over the medium term, boosted by hydro-projects ### Medium-term outlook and inflation - Growth is expected to accelerate over the medium term, boosted by hydro-projects and grant-financed capital investment. - In FY2024/25, growth is expected to accelerate as a large hydro-project is commissioned, the 13th FYP capital spending plans start to be implemented, and emigration pull factors wind down. - The positive supply-side factors should dominate demand pressures given import-intensive capital spending, allowing a gradual easing of inflation which is expected to move closer to 4 percent, in line with the midpoint of India’s inflation target band. ### External position and exchange restrictions - The external position of Bhutan in FY2022/23 was substantially weaker than the level implied by medium-term fundamentals and desirable policies. - Bhutan maintains two exchange restrictions under Article XIV, Section 2, to help manage the peg. - Bhutan also maintains three exchange restrictions subject to approval under Article VIII, Sections 2(a), and staff is not recommending approval of these measures. - A revenue-based fiscal consolidation combined with tighter monetary policy would allow an easing of import restrictions while contributing to a faster buildup of reserves. ### Fiscal policy and consolidation - A gradual but sustained fiscal consolidation is appropriate for Bhutan. - The authorities’ commitment to a fiscal deficit of 3 percent of GDP on average during the 13th FYP is welcomed, but 1 percent of GDP in additional policy measures would be needed to achieve that target. - Revenue mobilization efforts should be at the core of Bhutan’s fiscal strategy, anchored by the implementation of the GST in July 2025, and complemented by additional revenue measures and some expenditure restraint—particularly on the wage bill. - Judicious allocation of capital investment is key to advance Bhutan’s development agenda. - Domestic debt management should be strengthened, including by releasing a periodic calendar of issuances. ### Monetary policy and reserves - Monetary policy needs to be tightened in tandem with fiscal policy. - Balance-of-payments pressures continue and reserves remain below adequate levels (relative to the ARA metric). - In the short term, the CRR should be raised to its pre-pandemic level. - Priority: move towards a well-functioning domestic liquidity management framework; market-based measures are preferable to manage system liquidity. - The framework should support the monetary policy operation function, allowing the RMA to inject or absorb liquidity at a level needed to achieve price stability and support the peg. ### Financial sector vulnerabilities and supervision - Remaining financial sector vulnerabilities ought to be addressed. - Bank profitability has increased but remains low. - The recent expiration of support measures such as loan deferment is yet to be reflected in NPL levels—with particular concerns for the tourism and housing sectors. - New guidelines and regulations to address credit quality are a welcome development. - Policies should continue to be normalized and remaining vulnerabilities addressed, including reversing the pandemic-era relaxation of prudential regulations for housing loans and increasing risk weights for excessive exposure to hotels, tourism, and housing sectors. - Staff welcomes continued progress in moving towards risk-based supervision. ### Private sector jobs, FDI, and structural reforms - Reforms are needed to foster the creation of private sector jobs for high-skilled workers. - Efforts should focus on improving the business environment and encourage FDI, strengthen human capital accumulation, and improve active labor market policies. - The new FDI policy, which relaxes some restrictions including access to foreign currency, local employment requirements, and caps on foreign ownership in some sectors, is a welcome step. - Efforts to pursue bilateral trade agreements with countries in the region are positive. - The economic stimulus plan and 13th FYP should include initiatives to address barriers to export diversification by improving transportation and warehousing, and streamlining export processes. - The Gelephu Mindfulness City project could potentially complement these efforts, provided fiscal risks are contained. ### Governance, transparency, and SOE operations - There is scope to strengthen governance in the public sector, including RMA’s governance framework. - RMA’s efforts to strengthen its reserve management strategy in collaboration with SARTTAC are welcome, but further reforms are needed to ensure greater transparency on the role and responsibility of the government, RMA and other decision makers. - The use of reserves to finance crypto assets operations highlights the need for greater transparency of SOE operations. - The forthcoming production of audited statements of the crypto-mining operations are a step in the right direction. *Source: IMF staff report excerpt (Bhutan).* ### 54. Staff recommends that the next Article IV consultation with Bhutan takes place on a ### 1btnea2024001-print-pdf - 54. Staff recommends that the next Article IV consultation with Bhutan takes place on a ### Article IV timing - Staff recommends that the next Article IV consultation with Bhutan takes place on a 12-month cycle. ### Real sector developments - Bhutan’s post-pandemic economic recovery has been steady yet slower compared to other countries. - Consumption remained resilient while investment took longer to recover. - Tourism has not yet rebounded to pre-pandemic levels. - Inflation increased, driven by domestic prices following a hike in public sector wages; food prices have abated following the pandemic. - The labor market is tightening, but unemployment remains above its pre-pandemic level; male employment has returned to pre-pandemic levels while female participation remains well below full recovery. ### Fiscal developments - Tax revenue has recovered recently, but the delay in implementing the GST has structurally hindered indirect taxes. - Nontax revenue and grants have decreased. - Current expenditure declined mostly due to the unwinding of COVID support measures. - Capital expenditure declined in the most recent year as the 12th FYP came to an end. - The fiscal deficit has improved significantly but has yet to return to its pre-pandemic level. - Public debt steadily declined post-pandemic driven by hydro repayments, yet non-hydro debt continues to increase. ### Financial and monetary developments - Growth in broad money slowed post-pandemic, although credit to the private sector remained strong, predominantly led by housing loans. - Gross NPL levels moderated partly due to forbearance measures and recent NPL resolution efforts, but sectoral concentration of NPLs remains an issue. - Liquidity conditions tightened without a corresponding rise in minimum lending rates. - Recent T-bond auctions were undersubscribed. ### External developments - The REER appreciated in the second half of 2023, partly reversing the depreciation that began in late 2022. - The current account deficit widened significantly in FY 2021/22 and FY2022/23. - Reserves continued to fall due to imports of crypto assets mining equipment. - External debt service dynamics are driven by the lifecycle of hydropower projects. - Resumption of tourism has helped offset declines in other export sectors; India remains Bhutan’s major trading partner. ### Hydropower sector developments - The energy sector dominates output and exports and serves as a main source of budget financing. - Power generation capacity has remained largely unchanged since the pandemic. - Energy generation recently declined due to unfavorable weather; lower generation and rising domestic demand reduced exports and increased imports. - Domestic electricity demand has been mostly driven by high-voltage demand likely from crypto mining; the shift from higher priced exports to lower priced domestic sales is lowering revenues. ### Key data and tables (content highlights) - The document includes multiple figures and tables presenting detailed quarterly and annual data on real sector trends, fiscal accounts, monetary aggregates, financial soundness indicators, balance of payments, and hydropower sector metrics. - Tables present historical outturns and IMF staff projections for national accounts, prices, government accounts, public debt, monetary aggregates, balance of payments, and central government operations. *Source: Bhutan — IMF staff report content (figures and tables as presented in the provided PDF content).* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### Domestic risks - Hydro project implementation - Likelihood: Medium - Impact: Delays in the completion of hydropower projects could lower exports and hinder the external and fiscal balances. - Policies to Minimize impact: Implement measures to broaden the tax base, improve tax administration and further diversify the economy - GST Implementation - Likelihood: Medium - Impact: Delays would hinder the medium-term outlook for tax revenues and the fiscal balances. - Policies to Minimize impact: Continue the recent progress on IT solutions to avoid further delays - Banks Balance sheet risks - Likelihood: Medium - Impact: The expiration of Covid-related loan deferment and interest relief policies could weigh on credit growth, as these support measures had masked weaknesses. - Policies to Minimize impact: Support the exit of non-viable firms, ensure efficient restructuring. Banks should continue to build buffers and recognize problem loans ### External risks - Commodity price volatility - Likelihood: High - Impact: Bhutan imports fuel for transportation and electricity during the dry season, higher fuel prices would hinder the external balance - Policies to Minimize impact: Low external buffers imply little space to ameliorate the impact on fuel prices. Avoid delays on hydro projects and revisit domestic electricity prices. - Abrupt global slowdown - Likelihood: Medium - Impact: Would hurt non-hydro exports and tourism hindering the external balance - Policies to Minimize impact: Tighten fiscal and monetary policy to protect reserves. - Extreme climate events - Likelihood: Medium - Impact: Bhutan is particularly sensitive to glacial lake outburst flows. - Policies to Minimize impact: Continue to invest in climate change adaptation *Source: Appendix I. Risk Assessment Matrix* ### 7. Attrition accelerated in 2023 despite a significant pay increase. In the first five months of ### 7. Attrition accelerated in 2023 despite a significant pay increase. In the first five months of ### Attrition trends and service delivery impacts - In the first five months of 2023, before the release of the report of the Sixth Pay Commission, 1,722 civil servants resigned voluntarily, already surpassing the record set by 2022. - This included 183 resignations by health professionals and 488 resignations by teachers. - Between June and December 2023, two thousand additional resignations were submitted. - Reported impacts on public service delivery: - Remaining nurses are reportedly overburdened by having to take care of more patients. - 132 out of the 420 government-run Early Childhood Care and Development Centers remain closed due to lack of facilitators (caregivers). ### Recruitment response and administrative changes - The Royal Civil Service Commission recruited 3,332 civil servants in 2023. - Education: 1,607 new hires. - Health care: 549 new hires. - Hiring procedures relaxed to address shortages: - Local governments allowed to hire teachers during the school year rather than only once a year. - Hiring of foreign nurses on a temporary contract has been approved. - Applicants permitted to take the entry exam into the civil service as many times as desired provided they meet the age requirements. - Going forward, digitalization could help improve efficiency and ensure continuity in public service delivery. ### Drivers of the exodus - Migration out of Bhutan, particularly to Australia, explains a vast majority of the attrition among civil servants. - Australia student visa data cited: - 13,503 student visas granted to Bhutanese students between January and October 2023. - This was an increase of 67 percent from the total number of visas granted in the whole 2022. - The 2022 figure was 331 percent higher than in 2021. - Reported domestic push factors: high cost of living, poor pay and benefits, and work pressures. - On measured pay differences: - Wages in the public sector do not appear lower than those in the private sector. - Even before the recent hike, civil servants’ compensation was estimated to be 7.7 percent higher than their private sector peers on average after controlling for education and demographic characteristics (Alaref and others, 2024). ### Sixth Pay Commission recommendations and legal adoption - The Sixth Pay Commission recommended: - A uniform increase of 50 percent of the minimum pay scale across all positions in the civil service (in addition to the 5 percent increase already endorsed by the Pay Structure Reform Act of 2022 and coming into effect also in July 2023). - A 10-20 percentage point increase in professional allowances in the health sector: - Professional allowance for general doctors raised from 45 to 55 percent. - For specialist doctors raised from 55 to 70 percent. - For subspecialist doctors raised from 60 to 80 percent. - For the education sector, shifting tenure-based professional allowances to competency-based allowances (the Commission’s recommendation to change educational professional allowances to be based on competencies, rather than length of service, was not taken on board). - Parliament adopted most of the recommendations through the Pay Revision Act of Bhutan 2023; the pay increases were approved in June 2023. - Annual leave for civil servants increased from 12 to 21 days. ### Fiscal implications - The cost of the wage increase is estimated at BTN 6 billion per year. - BTN 6 billion represents 2.3 percent of GDP in 2023/24. - An exceptional dividend from state-owned holding company DHI would cover two thirds of the increase on average in 2023/24 and 2023/24. - The remaining third would represent a worsening of an already fragile fiscal position with persistent effect into the medium term. *Source: IMF staff report (Bhutan) — Extracted content from the provided PDF section.* ### 1. The coverage of public debt in this debt sustainability analysis (DSA) includes public and ### 1btnea2024001-print-pdf - 1. The coverage of public debt in this debt sustainability analysis (DSA) includes public and ### Debt coverage and scope - The coverage of public debt in this DSA includes public and publicly-guaranteed (PPG) debt. - PPG debt covers the non-financial public sector and the central bank. - Included debt instruments and entities: - Debt contracted by the central government. - Central bank (Royal Monetary Authority or RMA) debt (examples cited: standby credit facilities extended by the Government of India). - Non-financial state-owned enterprises (SOE) debt, both external and domestic. - Exclusions and definitions: - Central bank debt for the purposes of monetary policy or reserves management is excluded (examples: bilateral currency swap with the Reserve Bank of India, deposit from the Central Bank of Kuwait). - The external debt definition is based on residency. - Expansion of coverage: - Addition of non-guaranteed domestic SOE debt represents an expansion of coverage relative to the 2022 DSA, in line with the authorities’ commitment under the World Bank’s First Green and Resilient Growth Development Policy Credit (DPC) operation. - Because of full coverage of SOE external and domestic debt, the default shock of 2 percent of GDP for incomplete coverage in the contingent liability stress tests is removed. - Contingent liability calibration: - Outstanding amount of the National Credit Guarantee Scheme as of end-June 2023: 0.2 percent of GDP. - Financial market risk default value preserved at 5 percent of GDP. - Additional PPP contingent liability: 2 percent of GDP, estimated as 35 percent of PPP capital stock from the World Bank’s database. ### Public sector subsectors and compiled coverage (Text Table 1 summary) - Sub-sectors covered (marked X in source): Central government; State and local government; Other elements in the general government; Social security fund; Extra budgetary funds (EBFs); Guarantees to other entities; Central bank (borrowed on behalf of the government); Non-guaranteed SOE debt. - The country's coverage of public debt: The entire public sector, including SOEs. - Contingent liability default shock components and values used for the analysis: - Other elements of the general government not captured in 1.0 percent of GDP: 0.2 Outstanding amount of the National Credit Guarantee Scheme as of Jun 2023 - SoE's debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP: 0.0 - PPP 35 percent of PPP stock: 2.0 - Financial market (the default value of 5 percent of GDP is the minimum value): 5 percent of GDP: 5.0 - Total (2+3+4+5) (in percent of GDP): 7.3 ### Key background findings on debt dynamics - Public debt increased from 72.8 percent of GDP in FY2011/12 to 116.1 percent of GDP at the end of FY2022/23. - Contribution to the increase (43 percentage points total increase): - 28 percentage points attributable to hydropower projects (primarily bilateral agreements with India). - External non-hydro debt increased by only 3 percentage points over the decade. - Domestic debt evolution: - Domestic debt rose from 1.1 percent of GDP in FY2011/12 to 12.8 percent of GDP in FY2022/23. - Drivers: development of the domestic debt market and financing larger deficits during the COVID-19 pandemic. - Public and PPG debt composition at end-June 2023: - Public debt stood at 116.1 percent of GDP at the end of FY2022/23. - External debt accounted for 89 percent of total debt. - Hydropower debt comprised 69 percent of the external debt stock at end-FY2022/23. - 65 percent of PPG external debt denominated in Indian rupees. - Creditor composition of total debt: 61 percent bilateral, 27 percent multilateral. - Domestic debt primarily in treasury bills and bonds, held by domestic banks, insurance companies, and the public pension fund. ### Characterization of hydropower-related debt and risks - Hydropower-related debt from the Government of India treated akin to foreign direct investment (FDI). - India’s financing under intergovernmental agreements includes: - Government of India bearing construction and financial risks and committing to buy all surplus electricity at a purchase price at cost plus a margin. - Electricity price set at project commissioning and revisited every three years to incorporate cost changes. - Risk mitigation features: - Debt service begins only after project commissioning; construction delays do not automatically increase debt service risk. - Projects are insured and re-insured against natural disasters. - Exchange rate risk mitigated because electricity export receipts and hydropower debt services are denominated in Indian Rupees (to which the Ngultrum is pegged). - Debt default concerns mitigated because the creditor is also the project’s main client. - Specific financing terms for recent/ongoing projects with Government of India: - Repayment period of 15 years beginning after commissioning; interest rate of 10 percent in Indian rupees. - Capital grants share in total capital cost ranges from 30 to 40 percent depending on the project. ### Public Debt Management Policy 2023 (Box 1) - Cabinet approved the Public Debt Management Policy 2023 in June 2023, replacing the Public Debt Policy 2016. - Policy aims to provide a framework for prudent financing decisions and guide investment plans. - Features of the new policy: - Revises thresholds for public debt and maintains rules on government guarantees and the framework for debt monitoring and reporting. - Government guarantees require Minister of Finance and Cabinet approval. - Public companies can borrow only with written consent from the Ministry of Finance, per the Public Finance Act of Bhutan 2007. - Robust monitoring and reporting: annual Debt Sustainability Analysis; annual Medium-Term Debt Management Strategy; quarterly Public Debt Situation Reports. - Compared to the previous policy, thresholds are broadly loosened for non-hydro debt. - The policy covers domestic debt explicitly. - Authorities are updating their Medium-Term Debt Management Strategy (most recent version issued in March 2021 covering FY2020/21 to 2022/23). ### Comparison of debt policy thresholds (Text Table 2 highlights) - Public Debt Management Policy 2023 vs Public Debt Policy 2016 (selected thresholds): - Total debt stock (excl. hydro): 55 percent of GDP (2023 policy) vs (implied tighter prior policy). - Non-hydro external debt stock: 35 percent of GDP. - Annual debt service (routed through the budget): 35 percent of total revenues. - Annual debt service: 22 percent of domestic revenue. - Annual debt service of external debt: 25 percent of exports of goods and services. - Issuances of government guarantees: 10 percent of GDP (2023) vs 5 percent of GDP (2016). - Short-term external debt: 30 percent of surplus reserves. - Hydropower debt service coverage ratio: 1.2 (2023) vs 1.2 (2016). - Hydropower debt service: 50 percent of hydropower export revenue (2023) vs 40 percent (2016). - Debt-to-equity ratio for hydropower projects: 70:.30 ### Hydropower project status and projections (Box 2 and Text Table 3) - Commissioning expectations: - Punatsangchhu II: 1,020 MW, expected in CY2025, FY2025/26. - Punatsangchhu I: 1,200 MW, expected in CY2029, FY2028/29. - Within 5 years, commissioning of these two projects will double installed generation capacity as of end-2023 to 4,664MW. - Project timelines and notes: - Kholongchhu plant (600 MW) commissioning timeline uncertain; construction halted in CY2022; DGPC now sole shareholder; new financing sources being explored; DSA assumes commissioning early next decade. - Dorjilung project (1,125 MW) at an early stage; preliminary cost estimate US$ 1.3 billion; World Bank financing expected to cover some US$ 300 million; additional concessional and commercial financing being explored. - DGPC also developing smaller hydropower plants financed by its own resources and debt (example: renewable energy loan EUR 150 million with EIB). - Text Table 3 — Major hydropower projects (selected entries): - Existing Projects total installed capacity: 2,444 MW. - Projects under Construction total installed capacity: 2,820 MW. - Projects under Consideration total installed capacity: 1,125 MW. - Project-specific entries include Chukha (1974–1988: 336 MW), Tala (1997–2007: 1,020 MW), Kurichhu (1995–2002: 60 MW), Basochhu (1997–2005: 64 MW), Dagachhu (2009–2015: 126 MW), Mangdechhu (2010–2019: 720 MW), Nikachhu (2014–2024: 118 MW), Punatsangchhu I (2008–2029: 1,200 MW), Punatsangchhu II (2010–2025: 1,020 MW), Kholongchhu (2016–TBD: 600 MW), Dorjilung (TBD: 1,125 MW). ### Baseline macroeconomic assumptions underpinning the 2024 DSA - Real GDP growth and inflation: - Growth in FY2023/24 is expected to accelerate to 5.2 percent, compared to 5 percent in 2022/23. - Long-term growth projected around 5.2 percent (slightly lower than 5.8 percent assumed in the 2022 DSA). - Inflation expected to continue its steady decline towards 4 percent in the medium term. - GDP deflator assumed to move in tandem with inflation after adjusting for exchange rate depreciation. - Drivers and risks: - Medium-term growth drivers: new hydropower plants, implementation of the 13th Five Year Plan (FYP), recovery of tourism, recovery in services and manufacturing. - Compared to 2022 DSA, medium-term growth is higher due to revised timeline of hydro plants’ construction and ambitious investment in the 13th FYP. - Volatility in growth projections driven by (i) hydro/electricity sector and commissioning of new hydropower projects, and (ii) FYP planning cycle. - The DSA conservatively assumes delays (e.g., Kholongchhu) and notes that delays have limited impact on debt sustainability given repayment begins after commissioning under intergovernmental agreements. - Fiscal balance: - General government fiscal deficit projected to reach 4.6 percent of GDP in FY2023/24, a small improvement from 4.8 percent of GDP in FY2022/23. - A substantial increase in public sector wages (2 percent of GDP) was granted in June 2023. - An average of two thirds of that increase is being financed by an extraordinary dividend from DHI’s crypto assets operations in FY 2023/24 and FY 2024/25. - Revenue drivers: hydropower revenues expected to increase in FY2025/26 with commissioning of Punatsangchhu II; further tourism pickup increasing revenues from the SDF; implementation of the Goods and Service Tax (GST) expected by July 2025. - External grants projected to increase as the 13th FYP goes underway, driven by India’s commitment for grants amounting Nu. 100 billion and access to IDA financing on small economy terms (50 percent grant and 50 percent credit). - Long-run primary balance expected around 0.2 percent of GDP (described as “more do conservative” than 2022 DSA assumptions). - External balance: - The non-interest current account deficit (CAD) is expected to narrow (text cut off in supplied extract). *Source: Excerpt from the IMF DSA content provided in the supplied PDF content unit.* ### 16.3 percent of GDP in FY2023/2 4, after having ### 1btnea2024001-print-pdf - 16.3 percent of GDP in FY2023/24, after having ### Current account and current account deficit (CAD) - CAD was 16.3 percent of GDP in FY2023/24, after having reached 33.1 percent in FY2022/23. - Spike in the CAD was mostly due to: - lumpy imports of crypto assets mining equipment, - higher imports for the construction of new hydropower plants, - a slow post-COVID-19 recovery of tourism, - a jump in services imports due to high levels of emigration. - CAD projections: - CAD is expected to worsen again to 30.6 percent of GDP in FY2024/25 due to another round of lumpy imports of crypto assets mining equipment, financed by FDI. - Imports are expected to remain elevated over the medium term as investment projects are executed and the CAD is expected to average 16.5 percent of GDP over the medium term. - By 2028/29, the CAD is expected to decline to 10.4 percent of GDP. - In the long term, the CAD is expected to average 4.4 percent of GDP thanks to the pickup in electricity exports, diversification of the export base and a decline in imports following the completion of the hydropower projects. ### Financing mix and public borrowing costs - Gross financing needs in the projection period are expected to be covered by both external and domestic debt. - External loans (including from IDA, ADB, EIB, and the Government of India for hydro projects) are envisaged to finance around 82 percent of annual gross financing needs on average over the medium term, with the remainder financed by domestic borrowing. - Recent domestic auction yields: - T-bills around 4 percent. - T-bond: 6 percent for a 2-year bond issued in November 2023. - Long-term financing mix: - Share of domestic financing is expected to increase and average 57 percent of annual gross financing needs, with a gradual shift from short-term treasury bills to medium- and long-term bonds. - Share of concessional external debt is expected to decline over the long term. - Cost of domestic debt is assumed to be 7.5 percent for longer-dated bonds. - Footnote assumption: Crypto assets exports from the RMA-financed operation are assumed to be sufficient to fully repay the RMA, finance the DHI special dividend for the FY2023/24 and FY2024/25 budgets, and cover its electricity expenses. ### Key macroeconomic assumptions (selected figures from Text Table 4) - Real GDP growth (in percent): - 2021/2022: 5.0 - 2023/2024: 5.2 - MT (2025-2029): 6.3 - LT (2030-2044): 5.8 - GDP deflator in US dollar terms (in percent): -3.5; 3.0; 3.9; 4.0 (year groupings correspond to table) - Non-interest current account balance (in percent of GDP): -33.1; -16.3; -16.5; -4.4; -10.4; -8.9; -4.7; 4.0 (as presented in table rows) - Growth of exports of G&S (US dollar term, in percent): 3.0; 28.5; 15.7; 8.0; -5.3; 7.9; 14.1; 5.4 - Growth of imports of G&S (US dollar term, in percent): 10.7; -10.5; 12.5; 7.5; -6.2; 15.2; 7.4; 4.9 - Primary fiscal balance (in percent of GDP): -3.1; -3.0; -0.5; 0.2; -5.3; -8.8; -2.9; 1.7 - Note: 2021 refers to FY 2020/21. ### Bhutan’s crypto assets mining investment (DHI / RMA operation) - DHI invested in crypto assets mining; mining (mainly of bitcoin) at DHI’s 420 MW facility began in 2022. - Bitdeer Technologies Group began crypto assets mining in Bhutan in August 2023 (100 MW); a second Bitdeer mine (500 MW) is under construction and expected to begin operations in mid-2025. - RMA financing and exposures: - Between August 2020 and April 2022, the RMA acquired dollar-denominated securities issued by DHI totaling US$539 million. - DHI’s exposure to Bitdeer’s operations is limited to the sale of electricity under a power purchase agreement; Bitdeer pays a premium broadly in line with the average tariff under power purchase agreements with India. - Returns uncertainty and recent payments: - If bitcoin prices remain at around $60,000 per coin, DHI would be able to comfortably repay the RMA and earn a profit. - DHI made repayments in March 2024 and provided a special dividend of Ngu 2.7 billion (US$ 33 million) to the government. - DHI committed to provide another special dividend of Ngu 5.3 billion (US$ 64 million) in FY2024/25. - The RMA agreed to extend the maturity of the outstanding DHI securities by two years; these are now due to be repaid to the RMA between 2026 and 2027. - The extension entails coupon payments at a 4 percent rate, compared to the original bullet bond at a 1.5 percent rate. - The RMA has the right to request the sale of the crypto assets should it assess that reserves would decline below the constitutional minimum. - Macroeconomic impact of the operation: - RMA financing entailed a large drop in reserves. - Policies restricting select imports were imposed to support the peg. - Potential benefits: can increase exports and fiscal revenues. - Risks: volatile returns and competing demands for electricity (electrification, diversification of domestic production and exports). - Authorities are prioritizing domestic consumption for households and other industries, including through their pricing policies. ### Realism tools, fiscal assumptions, and capital contribution - Realism tools suggest macroeconomic and fiscal assumptions are broadly reasonable. - The 3-year adjustment in the primary balance is larger than the median of the sample of 3-year fiscal adjustments for LICs under IMF-supported programs since 1990; partly reflects a mechanical improvement as Punatshangchhu II is commissioned and tourism recovers. - Growth pick-up reflects hydro developments and implementation of the 13th FYP; contribution of government capital to GDP growth is assumed to be low and is cited as 11 percent versus a historical period contribution of 49 percent. - Debt dynamics feature two significant increases upon commissioning of Punatshangchhu I and II when interest during construction will be recognized; higher costs expected to be reflected in electricity tariff to India. ### Debt carrying capacity, thresholds, and classification - Debt carrying capacity (CI) calculated using April 2024 WEO and 2022 CPIA indicates a medium debt carrying capacity for this DSA; Bhutan’s previous assessments included a strong classification. - Applicable thresholds for Bhutan: - PV of external debt to exports: 240 percent. - PV of external debt to GDP: 55 percent. - Debt service to exports: 21 percent. - Debt service to revenue: 23 percent. - PV of total public debt in percent of GDP (public debt benchmark): 70 percent. ### External debt sustainability (baseline and stress tests) - Under the baseline: - PPG external debt indicators exceed thresholds for several years before falling below thresholds in later years. - PV of debt to GDP ratio would exceed the threshold until FY2035/36. - PV of debt to exports falls sustainably below threshold in FY2030/31, reflecting projected pick-up in hydro-related exports. - Debt service to exports ratio breaches threshold briefly in FY2027/28 and in FY2030/31-FY2031/32. - Debt service to revenue ratio would fall below its respective threshold only from FY2041/42, suggesting liquidity pressures despite increases in government revenues and grants. - External debt-to-GDP ratio trajectory: - 106.4 percent in FY2022/23, - about 120 percent in the medium term (by FY2028/29), - decrease to 79.7 percent by 2033/34, - about 37 percent in the long term (by FY2043/44). - External PPG debt-to-GDP ratio: - 103.3 percent in FY2022/23, - 117.4 percent in the medium term, - decline to 29.3 percent in the long term. - Stress tests and vulnerabilities: - A depreciation of the ngultrum could increase value of external liabilities (largely foreign currency), but because most external debt is denominated in rupees, to which the ngultrum is pegged, the risk does not appear significant. - An exchange rate shock could imply higher debt stock and higher debt service; PV of debt-to-GDP and debt service-to-revenue ratios would fall below thresholds only a couple of years after doing so in the baseline. - An export shock would worsen repayment capacity: PV of debt to exports ratio and debt service to exports ratio above thresholds until FY2037/38 and FY2042/43, respectively. - Export shocks could stem from delays in commissioning or construction of hydropower projects; Bhutan is also vulnerable to climate shocks. - Non-FDI-like external debt: - Excluding hydro debt associated with intergovernmental projects with India (IG), PV of external debt to GDP remains broadly stable, fluctuating between 27 and 33 percentage points between FY2023/24 to FY2033/34, significantly below the threshold of 55 percent of GDP. - No stress test breaches the threshold except a one-off marginal breach in the case of an export shock and a marginal breach for the combined shock. - Debt service-to-exports and debt service-to-revenue ratios only experience one-off marginal breaches. - PV of debt-to-exports ratio only breaches the threshold due to an exports shock between FY2027/28 and FY2030/31. ### Public debt sustainability and domestic debt management - Public debt dynamics closely follow external debt and do not pose an additional risk to the debt profile. - Under baseline, PV of debt to GDP would exceed the threshold until FY2036/37. - Under stress scenarios, PV of debt to GDP would be exceeded: - until FY2036/37 (primary balance and combination of shocks), - FY2037/38 (exports and other shocks), - FY2042/43 (depreciation). - PV of debt to GDP would exceed the threshold even by FY2043/44 in the case of a real GDP growth shock. - PV of debt to revenue ratio is projected to increase over the medium term, then decline after hydropower projects are commissioned. - Debt service-to-revenue ratio shows an inverted-U dynamic: expected to increase over the medium term as new hydropower plants are commissioned and repayment of their debt begins. - Domestic debt risks: undersubscription of recent bond auctions highlights the need to enhance domestic debt management. *Source: Bhutanese authorities and IMF staff estimates as presented in the provided content.* ### 14. This DSA assesses Bhutan at moderate risk of external and overall debt distress, ### 1btnea2024001-print-pdf - 14. This DSA assesses Bhutan at moderate risk of external and overall debt distress, ### Risk assessment and moderating factors - This DSA assesses Bhutan at "moderate risk of external and overall debt distress", similarly to the 2022 DSA. - Mechanical indicators point to a high risk of overall and external debt distress, with breaches in thresholds under the baseline scenario; judgment was applied given unique mitigating factors. - Sixty-one percent of Bhutan’s PPG external debt is linked to hydropower project loans from the Government of India, which covers both financial and construction risks of the projects and commits to buy all surplus electricity at a price reflecting cost plus profits. - The analysis highlights that external debt sustainability could be jeopardized by export shocks; within the moderate rating, Bhutan is assessed to have limited space to absorb additional shocks. ### Key risks identified - Uncertainties related to geopolitical tensions. - Further delays in the completion of hydropower plants. - Failure to address external imbalances. - Materialization of financial sector contingent liabilities. - External debt sustainability particularly vulnerable to export shocks. ### Baseline projections and selected indicators (exact values preserved from DSA) - External debt (nominal): 106.4 (2023); 103.7 (2024); 97.1 (2025); 113.9 (2026); 113.9 (2027); 108.4 (2028); 120.4 (2029); 79.7 (2034); 37.2 (2044); 106.1 (Average); 103.6 (Projections average). - Of which: public and publicly guaranteed (PPG) external debt: 103.3 (2023); 100.2 (2024); 93.9 (2025); 110.9 (2026); 111.0 (2027); 105.5 (2028); 117.4 (2029); 74.9 (2034); 29.3 (2044); 102.1 (Average); 100.2 (Projections average). - PV of PPG external debt-to-GDP ratio: 93.1 (2023); 92.0 (2024); 88.3 (2025); 100.5 (2026); 101.3 (2027); 97.2 (2028); 104.1 (2029); 66.3 (2034); 22.2 (2044). - PV of PPG external debt-to-exports ratio: 333.0 (2023); 277.3 (2024); 248.1 (2025); 227.0 (2026); 218.6 (2027); 250.8 (2028); 259.7 (2029); 148.4 (2034); 62.1 (2044). - PPG debt service-to-exports ratio: 13.2 (2023); 11.1 (2024); 10.2 (2025); 10.2 (2026); 12.2 (2027); 22.3 (2028); 18.9 (2029); 17.9 (2034); 8.0 (2044). - PPG debt service-to-revenue ratio: 20.2 (2023); 18.1 (2024); 18.8 (2025); 21.7 (2026); 27.3 (2027); 41.6 (2028); 33.7 (2029); 38.3 (2034); 16.6 (2044). - Gross external financing need (Million of U.S. dollars): 1,068.9 (2023); 466.7 (2024); 717.3 (2025); 879.0 (2026); 631.2 (2027); 1,026.7 (2028); 904.4 (2029); 570.7 (2034); 1,630.2 (2044). - Real GDP growth (in percent): 5.0 (2023); 5.2 (2024); 7.2 (2025); 6.4 (2026); 5.2 (2027); 5.6 (2028); 7.2 (2029); 5.0 (2034); 5.0 (2044). - Exports (percent of GDP): 28.0 (2023); 33.2 (2024); 35.6 (2025); 44.3 (2026); 46.3 (2027); 48.8 (2028); 40.1 (2029); 44.7 (2034); 35.8 (2044). - Imports (percent of GDP): 60.3 (2023); 49.8 (2024); 65.3 (2025); 62.8 (2026); 56.2 (2027); 55.2 (2028); 51.9 (2029); 44.9 (2034); 43.6 (2044). - Government revenues (excluding grants, in percent of GDP): 18.2 (2023); 20.3 (2024); 19.3 (2025); 20.7 (2026); 20.7 (2027); 20.8 (2028); 22.4 (2029); 20.9 (2034); 17.2 (2044). - Aid flows (in Million of US dollars): 175.3 (2023); 239.1 (2024); 388.7 (2025); 563.6 (2026); 561.1 (2027); 439.1 (2028); 345.4 (2029); 465.4 (2034); 771.5 (2044). - Nominal GDP (Million of US dollars): 2,908 (2023); 3,151 (2024); 3,516 (2025); 3,894 (2026); 4,259 (2027); 4,668 (2028); 5,177 (2029); 7,993 (2034); 18,126 (2044). - PV of PPG external debt (in Million of US dollars): 2,707.1 (2023); 2,897.7 (2024); 3,103.0 (2025); 3,915.0 (2026); 4,316.6 (2027); 4,537.1 (2028); 5,389.6 (2029); 5,302.8 (2034); 4,030.7 (2044). ### Public sector debt indicators (selected, exact values preserved) - Public sector debt: 116.1 (2023); 113.8 (2024); 109.2 (2025); 123.1 (2026); 122.3 (2027); 118.8 (2028); 130.2 (2029); 92.4 (2034); 44.1 (2044); 107.5 (Average); 114.6 (Projections average). - PV of public debt-to-GDP ratio: 106.4 (2023); 105.8 (2024); 103.8 (2025); 112.9 (2026); 112.9 (2027); 110.7 (2028); 117.2 (2029); 84.0 (2034); 37.1 (2044). - Revenue and grants (percent of GDP): 24.2 (2023); 24.2 (2024); 28.1 (2025); 31.5 (2026); 30.1 (2027); 28.2 (2028); 27.3 (2029); 24.4 (2034); 20.2 (2044). - Primary deficit: 3.1 (2023); 3.0 (2024); 2.4 (2025); -0.1 (2026); -0.2 (2027); 0.1 (2028); 0.4 (2029); -0.2 (2034); -0.2 (2044). ### Stress tests and scenarios (summary of results) - Historical scenario is based on the 10-year historical average; it yields higher future gross financing needs and total PPG debt levels due to COVID-related contraction, higher government spending, and weaker current account position; the report notes the historical scenario does not constitute an adequate forecast compared with baseline which envisages recovery and improved current account from increased electricity exports and decline in hydropower-related imports. - Sensitivity and bound tests show multiple instances where indicators breach benchmarks under adverse scenarios (tables and figures present specific breaches across PV debt-to-GDP, PV debt-to-exports, debt service-to-exports, and debt service-to-revenue ratios). - Excluding IG hydro debt and removing from hydro exports the amount needed to pay the debt service of those projects (so exports in stress tests reflect what is available to pay non-IG debt) materially affects stress-test outcomes; Figure 6 presents indicators excluding IG hydro debt. ### Drivers of debt dynamics and realism checks - Key debt dynamics drivers identified include: non-interest current account deficits, real GDP growth contributions, nominal interest rate contributions, price and exchange rate changes, and other debt-creating flows. - Realism tools (Figure 4) report projected fiscal adjustments and associated possible GDP growth paths under different fiscal multipliers; the DSA indicates projected fiscal consolidation paths and the distribution of past Fund-supported program adjustments. ### Policy recommendations (from the DSA text) - Undertake robust fiscal consolidation. - Intensify revenue mobilization efforts, including timely implementation of the GST. - Maintain a stable peg with the Indian rupee. - Implement reforms to improve productivity and competitiveness of the non-hydropower sector. - Enhance debt management to support debt sustainability. *Source: IMF staff estimates and projections as presented in the DSA content unit.* ### 1. Since Bhutan shifted to a democratic constitutional monarchy in 2008, the country has ### Since Bhutan shifted to a democratic constitutional monarchy in 2008, the country has embarked on a development strategy founded on the principle of Gross National Happiness. ### Development achievements and social outcomes - Sustained growth over the last decade increased gross national income per capita and lifted living conditions. - The UN recognized Bhutan's achievements in meeting the Human Assets Index and national income per capita thresholds; Bhutan graduated from the Least Developed Countries category in December 2023. - Population: about three-quarters of a million. - Geographic constraints: steep mountains and deep valleys leading to scattered population settlement patterns. - Ongoing efforts to address social inequality issues and regional disparities. - Environmental commitment: maintain at least sixty percent of total land under forest cover and remain carbon neutral. - Bhutan is one of the three carbon-negative countries with large forest cover and rich biodiversity. ### Growth performance and outlook - Real GDP growth: 4.9% in 2023. - Estimated growth: 6% in 2024, driven by domestic demand and recovery in the tourism sector. - Medium-term acceleration expected primarily from hydropower projects and grant-financed capital investment. - Inflation: averaged 3.7 percent in the first half of 2023; increased to 4.7 percent in the second half of 2023; imported inflation remained low. ### 13th Five Year Plan (2024-29) and capital spending - 13th FYP capital expenditure expected to be Ngu 245bn. - Financing: 51 percent financed by foreign grants, including Ngu 85bn from India. - India-financed Economic Stimulus Programme: Ngu 15bn to reinvigorate the economy in the short term. - Average fiscal deficit for the 13th FYP: 3% of GDP. ### Fiscal policy and public finances - Gradual fiscal consolidation underway based on revenue mobilization and spending restraint. - FY 2024-25 fiscal deficit estimated at 4.5% of GDP. - Punatsangchhu II commissioning will improve the fiscal deficit in FY2025/26. - Revenue supports: new hydro plants, recovery in tourism, cryptocurrency exports, and development partner support. - Within five years, commissioning of Punatsangchhu I and II will double installed generation capacity as of end-2023 to 4,664MW. - Dorjilung hydro plant: installed capacity of 1,125 MW; a significant portion of its electricity would be exported. - Wage bill: showed restraint despite increase in public sector wages in FY2023/24; increase financed primarily by exceptional dividends from the state-owned holding company DHI. - Authorities committed to improving efficiency and continuity in public service delivery, including digitalization. - Authorities committed to implementing the Goods and Services Tax (GST) by 2025/26 and undertaking other tax reforms. ### Public debt and hydropower-related financing - Hydropower debt has an FDI-like nature that mitigates debt sustainability risks: Government of India covers financial and construction-related risks and commits to buying all surplus electricity at a price reflecting cost plus a net return. - Interest earned during construction is capitalized and leads to higher debt levels; such debt does not accrue interest after commissioning, and debt service is reflected in the export tariff, implying no additional fiscal burden. - Central Government Debt (excluding intergovernmental Hydro-debt) in FY 2023-24: 43% of the GDP. - Public Debt Management Policy 2023 debt threshold: 55% of GDP. - Addressing rising public debt remains a policy concern and government priority for long-term sustainability. ### Monetary policy and RMA operations - Domestic liquidity management framework geared to address dissipation of pandemic liquidity buildup. - Authorities open to adding a proposed monetary policy operation to existing weekly liquidity management operation (a policy interest rate corridor) to align short-term money market rates to achieve price stability and support the peg. - IMF technical support to validate proposed policy rate and implementations (open market operations and determining haircut for eligible securities). - RMA lending to the government: temporary, repaid within three months of the end of the fiscal year; loan size capped to equivalent of 10 percent of the annual average government revenue in the preceding two years. - Authorities committed to enhancing transparency and independence in RMA functioning and strengthening internal control framework. ### Financial stability and banking sector vulnerabilities - Forbearance measures lapse in June 2024 could surface vulnerabilities. - Banks have significant exposure to hotels, tourism, and housing sectors; risks from slow international visitor pick-up and continued emigration could exert downward pressure on house prices. - RMA response: ban on lending for new housing and hotel construction (recently instated) and new guidelines covering loan restructuring, reclassification of NPLs, tightening credit report requirements, loan origination and monitoring, and directives to reduce evergreening. - Upon lifting of ban on new housing and hotel construction, RMA imposed risk weight of 150% for sanctioning of new housing loans if bank’s exposure has exceeded 30%. ### External sector and exchange rate policy - Exchange rate peg with the Indian Rupee supported by India being major trading partner and source of FDI. - India is destination of 86 percent of Bhutan's exports and source of 73 percent of Bhutan's imports. - Bulk of external debt: 68 percent of GDP and 61 percent of total debt is in INR. - Debt service majority: 2 percent of GDP and 51 percent of total debt service payments is in INR. - India is largest source of FDI: 51 percent. - Reserves: recovered to $609 million (4.7 months of imports) by end of May 2024 owing to recovery in tourism, non-hydro exports, and a jump in inward remittances. - External reserves remain adequate to meet the 12 months of Essential Imports coverage. - Measures that slowed reserve decline: import restrictions on vehicles, lending bans, increased incentives on remittances. - Authorities acknowledge need to maintain adequate reserves to support peg credibility. - External shocks (tourist arrival drop, jump in service imports due to emigration) had earlier led to reserve decline and pressure on the peg. ### Cryptocurrency operations and DHI securities - Cryptocurrency investment described as a strategic decision leveraging idle reserves to exploit comparative advantage and diversify the economy; expertise from crypto mines could be used in other industries such as data centers. - Holding strategy includes measures to minimize risk of default on outstanding DHI securities. - RMA agreed to extend maturity of outstanding DHI securities by two years to optimize timing of cryptocurrency asset sales based on market prices. - Extension entails coupon payments at a 4 percent rate compared to original bullet bond at a 1.5 percent rate. - RMA has the right to request sale of crypto assets if it assesses reserves would decline below the constitutional minimum. ### Structural reforms and diversification - Growth and productivity concentrated in few sectors, notably hydropower-based electricity generation; majority of employment in low-productivity sectors. - Private sector mainly microenterprises with relatively low productivity and limited growth prospects. - Constraints for non-hydro sectors: challenging investment climate, high trade costs, small domestic market; limited competitiveness and limited job creation outside public sector and agriculture. - Authorities prioritize addressing lack of economic diversification and limited private sector activity. - Consideration of appropriate financial instruments and mechanisms to facilitate aggregation and strengthen commercial value chains in agribusinesses. - New FDI policy under consideration to relax some restrictions including access to foreign currency, local employment requirements, and caps on foreign ownership in certain sectors. - Success of single-window platform for micro-enterprises will be extended to large and medium enterprises by FY2025/26. - Efforts to address export diversification barriers include improving transportation and warehousing and streamlining export processes. - Gelephu Mindfulness City project envisioned as a Special Administrative Region (SAR) with legal independence; work on relevant legal framework is ongoing. ### Capacity development and statistical improvements - RMA tested a credit risk scoring model for loan applications under the Basel III LCR Framework with SARTTAC support; model to be implemented across all financial institutions by FY2024/25. - Recent accomplishments: recalibration of national accounts, CPI, and PPI; transition from annual to quarterly labor force surveys. - Plans to introduce quarterly national accounts. - Authorities requested IMF TA support (CD) on Government Finance Statistics Manual (GFSM); proposed TA mission in December 2024. - RMA undertaking significant HR reforms and sees need for expertise; reinstatement of attachment program for RMA officials at the Asia and Pacific Department (APD) of the IMF (discontinued in 2013) would be an opportunity for staff development. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1btnea2024001-print-pdf.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1btnea2024001-print-pdf.pdf_