## Bhutan’s Tax Reforms ## Source details **Canonical URL:** [Bhutan’s Tax Reforms](https://www.imf.org/-/media/files/publications/cr/2026/english/1btnea2026001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1btnea2026001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1btnea2026001-source-pdf.pdf.json) --- ### Context and structural challenges - Bhutan eliminated extreme poverty by 2022 and graduated from the UN’s Least Developed Country category in December 2023. - Over 60 percent of land under forest cover; committed to climate neutrality. - Key structural vulnerabilities: - High dependence on hydropower production and strong trade and development ties with India. - Need to diversify the economy and expand private sector employment to reduce outward emigration, especially among youth. - Gelephu Mindfulness City (GMC) project could attract investment and jobs but entails fiscal and financial risks. - Financial sector strengthening is critical to channel resources to emerging sectors. ### Recent developments and macroeconomic outlook - Growth and inflation - Real GDP growth: 9.1 percent in 2024Q4. - Growth in 2025: 7.7 percent (2025Q1) and 9.6 percent (2025Q2). - Headline inflation: stabilized below 2 percent through mid-2024; trended up in 2025 as food inflation rebounded through 2025H1. - Labor market - Overall unemployment: increased to 3.2 percent in 2025Q3 from 3.1 percent in 2024Q3. - Youth unemployment: rose to 17.8 percent in 2025Q3 from 16.5 percent in 2024Q3. - Fiscal and external positions - Overall fiscal deficit: 0.2 percent of GDP in FY2023/24; about 2.6 percent of GDP in FY2024/2025 as capital spending normalized. - Public and publicly guaranteed debt: declined to 118 percent of GDP from 129 percent of GDP in FY2021/22. - Current account deficit: declined from 35 percent of GDP in FY2022/23 to 19 percent of GDP in FY2024/25. - Foreign reserves: increased to US$1 billion (6 months of imports) from US$574 million during FY2022/23; remain below the 2021 peak of US$1.3 billion and below the ARA metric of 7 months of imports. - Tourism and remittances - Tourist arrivals: increased by 41 percent y/y in 2024; tourism receipts grew 35 percent despite SDF reduction from US$200 to US$100 per night for non-Indian tourists. - Share of non-Indian tourists increased; Indian tourist arrivals remain about 40 percent of pre-pandemic level. - Remittances increased due to an expanded diaspora. - Financial stability - Capital adequacy ratio: 16 percent (requirement 12½ percent). - NPLs: 3.2 percent (8 percent with charge-offs). - Deferred loans: about 13.2 percent of the loan portfolio; deferral ended in June 2025 with restructuring windows and sectoral extensions through end-December. ### Projections and medium-term outlook - Short-term projections - Real GDP growth: 6.8 percent in FY2024/25 and 7.4 percent in FY2025/26. - Average headline inflation: forecast to increase to 3.5 percent in FY2025/26 (from 2.5 in the previous year), converging toward 4 percent. - Current account deficit: expected to remain broadly at same level; foreign reserves projected to improve partly reflecting expected repayments of the RMA loan between mid-2026 and mid-2027. - Medium-term projections - Real GDP: projected to expand by around 6.5 percent, driven by hydropower generation, public investment, and recovery in services including tourism. - Inflation: expected to stabilize around 4 percent. - Current account deficit: projected to gradually decline as electricity exports increase. - Fiscal deficit: projected to fluctuate between 3 and 5 percent of GDP, with one-off dividends from commissioning of hydro projects and a slowing down of external grants as the 13th FYP ends. - Public and publicly guaranteed debt: expected to gradually increase to around 141 percent of GDP by FY2028/29 (from around 118 percent in FY2024/25) due to recognition of interest earned during construction of Punatsangchhu I and II; these higher costs would be reflected in the electricity export price and would not represent a fiscal burden for the government. ### Risks and vulnerabilities - Domestic risks - Delays in completing major hydropower projects would dampen output and revenues. - GMC risks: independent tax legislation could erode the tax base, crowd-out pro-growth public investment, and create contingent liabilities for general government; information sharing between MoF and GMC recommended to prevent revenue leakage. - Exposure of GIDC finances and RMA assets to crypto asset price volatility. - State-led crypto operations raise balance-of-payments pressure concerns. - External risks - Fuel price volatility. - Climate shocks, including glacial lake outburst floods. - Global slowdown weakening tourism and non-hydro exports. - Limited indirect impact from recent higher U.S. tariffs on Bhutan through India given India’s relatively low merchandise trade exposure. ### Fiscal policy stance and revenue mobilization (tax reform implications) - Fiscal target and stance - Authorities’ medium-term goal: fiscal deficit of 3 percent of GDP on average during the 13th FYP; staff concurs but projects additional efforts are needed to meet the target. - Recommended approach: gradual revenue-based fiscal consolidation, complemented by some monetary tightening to support the peg and rebuild buffers. - Emphasis: contain current expenditure (including cautious wage-bill management) to allow pro-growth capital expenditure and protect social spending. - Tax reform package (implementation slated for January 2026) - Components: a new GST that streamlines exemptions and unifies rates, revisions to the CIT, and replacement of the business tax with a PIT. - Expected effects: - GST simplification expected to enhance compliance. - CIT revisions and business tax replacement with PIT expected to improve the business environment and progressivity. - Lower rates under the new system—GST reduced from 7 to 5 percent—will dampen the yield of indirect taxes compared to earlier plans. - Fiscal implications and recommendations: - Graduation from low-income status and lifecycle of 13th FYP projects will likely entail a gradual reduction in external grants, necessitating further domestic revenue mobilization. - Bhutan’s 5 percent GST rate is among the lowest in the Asian and Pacific region—higher only than Myanmar’s and Timor-Leste’s rates—indicating scope to raise revenue through higher rates. - Additional revenue measures suggested by FAD TA are needed to achieve the 3 percent deficit goal and support ambitious capital spending plans. - Address taxation scope/levels on motor vehicles and fossil fuels, and improve compliance through digital systems, to enhance revenues while supporting environmental goals. - Complementary measures: clear legislation around the GMC and information sharing between MoF and GMC to prevent revenue leakage due to potential tax differentials. - Debt and financing of hydropower - Shift in financing models for new hydro projects (from intergovernmental agreements with the Government of India to strategic partnerships with private investors, private lenders, and international financial institutions) could boost revenue from new hydro projects but may imply additional government risk-taking by reducing the FDI-like nature of past external debt commitments. ### Box 1 — Reform overview and key design elements - Reform overview - Parliament approved a comprehensive tax reform streamlining the tax system and boosting tax efficiency. Amendments to the GST bill, excise tax bill, and income tax bills passed in July 2025, with all coming into force in January 2026. - Objectives: modernize the tax system, broaden the tax base, simplify administration, and boost compliance. - Goods and Services Tax (GST) - Replaces the current sales tax characterized by seven rates: 0, 5, 10, 20, 25, 30, 50, that applied only to goods, with a single statutory rate. - New statutory rate: 5 percent (compared to a previous proposal of 7 percent). - Exemptions reduced from over 200 to 5 (the number of exemptions refers to the number of six-digit codes of Bhutan’s trade classification (BTC) exempted from the statutory GST rate under Schedule IV, C, of the GST law). - Electricity and telecommunications sectors will be subject to the GST. - Implementation effects: - Streamlines exemptions and unifies rates, reducing administrative costs and expected to boost compliance. - Revenue impact depends on whether compliance improvements and broader base offset the lower rate: - Authorities’ estimates (assuming a significant improvement in compliance): revenue yield of 0.9 percentage points of GDP relative to the sales tax. - Assuming more modest improvements in compliance: expected loss of revenue about 0.2 percentage points of GDP. - Excise tax law - Streamlined list of excisable goods. - Green Tax absorbed into the broader excise tax regime, replacing standalone Green Tax levies. - Streamlining implies reduction of tax rates for products such as vehicles. - Overall expected to be revenue-neutral. - Income tax reform - Merges business and personal income tax, exempts small taxpayers, and revises PIT brackets. - Lowered income and corporate tax rates. - Introduced a tax on capital income with a relatively high threshold. - Includes provisions allowing the government to enter double taxation agreements with foreign governments. - Fiscal and distributional interactions: - Once fully implemented, medium-term revenue impact expected to be a loss of around 2 percent of GDP compared to the FY2024/25 collection. - Over 75 percent of income taxes are paid by SOEs and will be compensated by higher dividend transfers. - Commencement of new hydro projects will buffer the decline in revenue and further improve direct tax collection starting in FY2029/30. ### Key revenue and fiscal figures (selected projections) - 2024/25 — 2029/30 projections (percent of GDP unless otherwise stated): - 2024/25: Revenue & Grants 28.4; Tax revenue 15.3; direct taxes 10.8; tax on goods and serv. 4.2; Non-tax revenue 6.3; SOE dividends 1.25; Total Budgetary Grants 6.0 - 2025/26: Revenue & Grants 32.1; Tax revenue 15.3; direct taxes 10.8; tax on goods and serv. 4.2; Non-tax revenue 7.2; SOE dividends 2.7; Total Budgetary Grants 8.8 - 2026/27: Revenue & Grants 30.7; Tax revenue 13.6; direct taxes 9.2; tax on goods and serv. 4.1; Non-tax revenue 7.2; SOE dividends 3.6; Total Budgetary Grants 9.3 - 2027/28: Revenue & Grants 30.4; Tax revenue 13.8; direct taxes 9.4; tax on goods and serv. 4.1; Non-tax revenue 7.1; SOE dividends 3.5; Total Budgetary Grants 9.0 - 2028/29: Revenue & Grants 26.2; Tax revenue 13.7; direct taxes 9.3; tax on goods and serv. 4.0; Non-tax revenue 7.8; SOE dividends 3.8; Total Budgetary Grants 4.2 - 2029/30: Revenue & Grants 27.2; Tax revenue 14.5; direct taxes 10.2; tax on goods and serv. 4.0; Non-tax revenue 8.6; SOE dividends 6; Total Budgetary Grants 3.1 ### Policy implications and recommendations (Box 1) - Ensure seamless implementation and close coordination between the Department of Revenue and Customs and the GMC authorities to mitigate risks to revenue mobilization. - Use higher dividend transfers from SOEs to offset much of the income tax revenue loss given that over 75 percent of income taxes are currently paid by SOEs. - Leverage the start-up of new hydro projects to improve direct tax collection beginning in FY2029/30. - Strengthen medium-term budgeting (MTB) to: - Reduce expenditure volatility, contain current spending, and improve spending efficiency. - Convert medium-term fiscal projections into binding multi-year ceilings and require reliable multi-year forward estimates and a rolling MTBF. - Complement with periodic wage-setting assessments, spending reviews, specific short-term fiscal targets, enhanced program and performance budgeting, and an improved financial management information system. - Continue implementation of a Treasury Single Account and integrate capital-project appraisal and monitoring. - Manage fiscal prudence and domestic borrowing carefully to limit debt sustainability risks, notably when transitioning to new financing models for hydropower projects; ensure managerial independence, arms-length relations with government, regular audits, and comprehensive reporting by special purpose vehicles. - Strengthen oversight and transparency on SOE operations by applying disclosure requirements similar to publicly-listed companies. ### Hydropower sector and debt implications - Hydropower role and projects - Punatsangchhu-I: 1,200 MW; revised completion by FY2028/29 with elevated risks. - Punatsangchhu-II: 1,020 MW; began operations in December 2024; all six turbines commissioned during FY2024/25. - Nikachhu: 118 MW; fully commissioned April 2024. - Sunkosh: 2,585 MW; preparatory phase; construction expected to begin December 2028. - Dorjilung: 1,125 MW; preparatory phase. - Khorlochhu: 600 MW; construction began January 2025; planned full commissioning in 2030. - Debt composition and characteristics - Public and publicly guaranteed (PPG) debt: 118 percent of GDP at end-FY2024/25. - External debt: 91 percent of total debt; hydropower debt comprised 55 percent of the external debt stock at end-FY2024/25. - 64 percent of total debt owed to bilateral creditors; 25 percent owed to multilaterals. - 69 percent of PPG external debt denominated in Indian rupees. - Hydropower debt under IG agreements with India characterized as akin to FDI: Government of India bears construction and financial risks and commits to buy surplus electricity at cost-plus margin. - Financing modalities and risks - New projects shifting toward joint ventures and commercial non-recourse debt (SPVs) may reduce the FDI-like nature of past external debt commitments and create contingent liabilities that need careful budgeting and oversight. - DSA projections: public and PPG debt expected to rise toward FY2028/29 then decline over long term; PV of public debt-to-GDP ratios and debt service ratios may breach thresholds under baseline and stress scenarios, highlighting need for consolidation and buffers. ### Crypto-mining operations (Annex I) — exposures, operations, and recording - Operational timeline and scale - Mid-2023: 100 MW mining data center in Gedu operational. - Jigmeling 500 MW facility fully operational by October 2025. - Four additional state-run mining sites operate nationwide. - State bitcoin holdings and valuation - Boosted by 2024–25 price boom, remaining crypto holdings likely exceeded 10,000 BTC (worth over US$1 billion) as of mid-2025. - Arkham’s data as of November 24th: state bitcoin holdings about US$550million, reflecting a reduction of 43 percent in holdings and a 22 percent decline in the price of bitcoin since mid-September. - Made Bhutan the sixth largest government Bitcoin holder in the world and the most significant as a share of GDP at close to 40 percent. - Energy and balance-of-payments implications - Domestic electricity usage surged by over 60 percent in 2023 (driven by new industrial loads from crypto mining). - Power exports to India dropped by about a third in 2023. - Electricity imports surged during dry winter months to meet internal demand. - Large reserve drawdowns in 2022 to finance crypto-mining operations (about 539 million used in 2022—over 40 percent of total reserves per IMF Country Report No. 24/298). - Risks and policy responses - Price volatility: Bitcoin fell by over 75 percent in 2022; November 2025 sell-off led to a 17½ percent decline. A severe downturn could erode crypto asset value, cut mining revenues, and strain GDL repayments to the RMA. - Operational measures: consumers and other industries have priority access to electricity over crypto mining; Jigmeling facility to power down in winter. - Regulatory stance: crypto asset on-ramping not allowed in Bhutan; RMA confines crypto activities to a special regulatory sandbox with strict conditions. On-ramping allowed in the GMC increases need for clearer laws and AML/CFT rules. - Accounting and statistical recording: staff stress importance of recording crypto asset operations in national statistics, including the balance of payments; classification debates noted (produced vs non-produced non-financial asset). - Cybersecurity: managing large digital asset portfolios raises cybersecurity stakes; breaches or loss of keys could have significant financial repercussions. ### Debt sustainability assessment (DSA) — summary findings and stress tests - Debt carrying capacity: DCC assessed as Strong. - Baseline external debt dynamics (selected) - External debt-to-GDP: around 111 percent in FY2024/25; about 150 percent by FY2028/29; decline to 97 percent by 2035/36; about 40 percent by FY2045/46. - PV of total public debt benchmark: 70 (applicable threshold). - Public sector debt projections (selected) - Public sector debt (percent of GDP): 2025 117.7; 2026 122.8; 2027 126.0; 2028 125.4; 2029 140.6; 2036 94.9; 2046 54.9. - PV of public debt-to-GDP ratio: examples include 112.6 (2025), 121.9 (2028), 132.4 (2029), 90.1 (2036), 48.0 (2046). - Stress-test outcomes and vulnerabilities - Exchange rate shock (30 percent nominal depreciation or size needed to close REER gap): PV of debt-to-GDP ratio would fall below thresholds only a couple of years later than baseline; debt service to exports and revenue ratios remain pressured in early years. - Export shock and delays in hydropower commissioning: could keep PV of debt-to-exports and debt-service ratios above thresholds deep into the projection horizon. - Non-FDI-like external debt exclusion: excluding IG-linked hydro debt, PV external debt-to-GDP remains broadly stable below 50 percent. - Swap line repayments: half of June 2025 swap balance already repaid by the RMA; remaining balance causes marginal breaches in debt service ratios in FY2025/26–FY2026/27 only. - Key recommendations from DSA - Robust fiscal consolidation underpinned by revenue mobilization and timely GST implementation. - Maintain the peg with the Indian rupee and develop domestic bond market. - Carefully assess and manage contingent liabilities from non-FDI financing modalities for hydropower (SPVs, nonrecourse debt), ensuring transparency and fiscal safeguards. ### Policy recommendations and priorities (consolidated) - Fiscal policy - Pursue gradual revenue-based fiscal consolidation to reach the 3 percent of GDP fiscal deficit target during the 13th FYP, combined with containment of current spending and protection of pro-growth capital expenditure. - Implement additional revenue measures (beyond the tax reform package) as advised by FAD TA to achieve fiscal targets. - Strengthen medium-term budgeting (MTB), adopt binding multi-year ceilings, and improve public financial management and capital-project appraisal/monitoring. - Tax and revenue administration - Ensure successful GST rollout (January 2026), strengthen staffing and training in tax offices, and deploy digital systems to improve compliance. - Consider adjusting GST rate given that 5 percent is among the lowest in the Asian and Pacific region; assess motor vehicle and fossil fuel taxation to raise revenue while supporting environmental goals. - Use higher SOE dividend transfers to offset income tax revenue losses where appropriate. - Financial and monetary policy - Gradually normalize monetary policy to support reserve accumulation and the peg; absorb excess liquidity and develop interbank market and an interest rate corridor. - Strengthen bank supervision, enforce prudential norms, adopt expected-credit-loss provisioning, and prepare for stricter provisioning for restructured loans in 2026. - Hydropower and contingent liabilities - Manage new financing modalities (SPVs, commercial debt) carefully to limit fiscal risk; ensure managerial independence of SPVs, regular audits, comprehensive reporting, and limited direct fiscal recourse. - Maintain insurance and contractual risk mitigation for hydrological and natural disaster risks. - GMC and crypto - Coordinate MoF and GMC to prevent revenue leakage; clarify GMC legal/regulatory framework to limit tax and regulatory arbitrage. - Tighten AML/CFT, cybersecurity, and reporting frameworks around crypto activities; ensure recording of crypto operations in national statistics and BoP. - External resilience - Build reserves toward adequacy metric (ARA of 7 months of imports) while managing swap lines and repayments. - Diversify exports and partners to reduce concentration risk with India and hydropower. *Source: IMF staff report excerpt — “Bhutan’s Tax Reforms”* ### 1. Bhutan’s Tax Reforms _________________________________________________________________________ 10 ### Bhutan’s Tax Reforms ### Context and structural challenges - Bhutan eliminated extreme poverty by 2022 and graduated from the UN’s Least Developed Country category in December 2023. - The country maintains over 60 percent of its land under forest cover and has committed to climate neutrality. - Key structural vulnerabilities: - High dependence on hydropower production and strong trade and development ties with India. - Need to diversify the economy and expand private sector employment to reduce outward emigration, especially among youth. - Gelephu Mindfulness City (GMC) project could attract investment and jobs but entails fiscal and financial risks. - Financial sector strengthening is critical to channel resources to emerging sectors. ### Recent developments and macroeconomic outlook - Growth and inflation - Real GDP growth accelerated to 9.1 percent in the fourth quarter of 2024. - Growth in 2025: 7.7 percent (2025Q1) and 9.6 percent (2025Q2). - Headline inflation stabilized below 2 percent through mid-2024 but trended up in 2025 as food inflation rebounded through 2025H1. - Labor market - Overall unemployment increased to 3.2 percent in 2025Q3 from 3.1 percent in 2024Q3. - Youth unemployment rose to 17.8 percent in 2025Q3 from 16.5 percent in 2024Q3. - Fiscal and external positions - Overall fiscal deficit declined to 0.2 percent of GDP in FY2023/24. - For FY2024/2025, the deficit widened to about 2.6 percent of GDP as capital spending normalized. - Public and publicly guaranteed debt declined to 118 percent of GDP from 129 percent of GDP in FY2021/22. - Current account deficit declined from 35 percent of GDP in FY2022/23 to 19 percent of GDP in FY2024/25. - Foreign reserves increased to US$1 billion (6 months of imports) from US$574 million during FY2022/23; reserves remain below the 2021 peak of US$1.3 billion and below the ARA metric of 7 months of imports. - Tourism and remittances - Tourist arrivals increased by 41 percent y/y in 2024, driving a 35 percent growth in tourism receipts despite SDF reduction from US$200 to US$100 per night for non-Indian tourists. - Share of non-Indian tourists (higher spending per trip) increased; Indian tourist arrivals remain about 40 percent of pre-pandemic level. - Remittances increased on the back of an expanded diaspora. - Financial stability - Capital adequacy ratio at 16 percent (requirement 12½ percent). - NPLs at 3.2 percent (8 percent with charge-offs). - Deferred loans amount to about 13.2 percent of the loan portfolio; deferral ended in June 2025 with restructuring windows provided and extensions for hotel and tourism sectors through end-December. - GMC and crypto-related exposures - GMC: new city spanning 2,600 square km at the border with India; legal framework combining Singaporean common law and Abu Dhabi Global Market–modeled financial services regulations; plans to establish a customs border; Gelephu Nation Building Bond raised Ngu 3.3 billion (about US$37 million) from over 35 thousand retail investors. - Crypto-mining operations: large reserve drawdowns in 2022 to finance crypto-mining operations (about 539 million used in 2022—over 40 percent of total reserves per IMF Country Report No. 24/298). State-led operations involve large-scale public investment and holding of crypto assets; GIDC and RMA assets exposed to sudden changes in crypto asset values. ### Projections and medium-term outlook - Short-term projections - Real GDP growth projected at 6.8 percent in FY2024/25 and 7.4 percent in FY2025/26. - Average headline inflation forecast to increase to 3.5 percent in FY2025/26 (from 2.5 in the previous year), converging toward 4 percent. - Current account deficit expected to remain broadly at the same level; foreign reserves projected to improve partly reflecting expected repayments of the RMA loan between mid-2026 and mid-2027. - Medium-term projections - Real GDP projected to expand by around 6.5 percent, driven by hydropower generation, public investment, and a recovery in services including tourism. - Inflation expected to stabilize around 4 percent. - Current account deficit projected to gradually decline as electricity exports increase. - Fiscal deficit projected to fluctuate between 3 and 5 percent of GDP, with one-off dividends from commissioning of hydro projects and a slowing down of external grants as the 13th FYP ends. - Public and publicly guaranteed debt expected to gradually increase to around 141 percent of GDP by FY2028/29 (from around 118 percent in FY2024/25) due to recognition of interest earned during construction of Punatsangchhu I and II; these higher costs would be reflected in the electricity export price and would not represent a fiscal burden for the government. ### Risks and vulnerabilities - Domestic risks - Delays in completing major hydropower projects would dampen output and revenues. - GMC risks: independent tax legislation could erode the tax base, crowd-out pro-growth public investment, and create contingent liabilities for general government; information sharing between MoF and GMC recommended to prevent revenue leakage. - Exposure of GIDC finances and RMA assets to crypto asset price volatility. - State-led crypto operations raise balance-of-payments pressure concerns. - External risks - Fuel price volatility. - Climate shocks, including glacial lake outburst floods. - Global slowdown weakening tourism and non-hydro exports. - Limited indirect impact from recent higher U.S. tariffs on Bhutan through India given India’s relatively low merchandise trade exposure. ### Fiscal policy stance and revenue mobilization (tax reform implications) - Fiscal target and stance - Authorities’ medium-term goal: fiscal deficit of 3 percent of GDP on average during the 13th FYP; staff concurs this is appropriate but projects additional efforts are needed to meet the target. - Recommended approach: gradual revenue-based fiscal consolidation, complemented by some monetary tightening to support the peg and rebuild buffers. - Emphasis on containing current expenditure (including cautious wage-bill management) to allow pro-growth capital expenditure and protect social spending. - Tax reform package (implementation slated for January 2026) - Reforms include a new GST that streamlines exemptions and unifies rates, revisions to the CIT, and replacement of the business tax with a PIT. - Expected effects: - GST simplification expected to enhance compliance. - CIT revisions and business tax replacement with PIT expected to improve the business environment and progressivity. - Lower rates under the new system—GST reduced from 7 to 5 percent—will dampen the yield of indirect taxes compared to earlier plans. - Fiscal implications and recommendations: - Bhutan’s graduation from low-income status and the lifecycle of 13th FYP projects will likely entail a gradual reduction in external grants, necessitating further domestic revenue mobilization. - Bhutan’s 5 percent GST rate is among the lowest in the Asian and Pacific region—higher only than Myanmar’s and Timor-Leste’s rates—indicating scope to raise revenue through higher rates. - Additional revenue measures suggested by FAD TA are needed to achieve the 3 percent deficit goal and support ambitious capital spending plans. - Addressing taxation scope/levels on motor vehicles and fossil fuels, and improving compliance through digital systems, would enhance revenues while supporting environmental goals. - Complementary measures: clear legislation around the GMC and information sharing between MoF and GMC to prevent revenue leakage due to potential tax differentials. - Debt and financing of hydropower - Changes in financing models for new hydro projects (from intergovernmental agreements with the Government of India to strategic partnerships with private investors, private lenders, and international financial institutions) could boost revenue from new hydro projects but may imply additional government risk-taking by reducing the FDI-like nature of past external debt commitments. *Source: IMF staff report excerpt — “Bhutan’s Tax Reforms”* ### Box 1. Bhutan’s Tax Reforms ### Box 1. Bhutan’s Tax Reforms ### Reform overview - Parliament approved a comprehensive tax reform streamlining the tax system and boosting tax efficiency. Amendments to the goods and service tax (GST) bill, excise tax bill, and income tax bills passed in July 2025, with all coming into force in January 2026. - Objectives: modernize the tax system, broaden the tax base, simplify administration, and boost compliance. ### Goods and Services Tax (GST) - Replaces the current sales tax characterized by seven rates: 0, 5, 10, 20, 25, 30, 50, that applied only to goods, with a single statutory rate. - New statutory rate: 5 percent (compared to a previous proposal of 7 percent). - Exemptions reduced from over 200 to 5 (the number of exemptions refers to the number of six-digit codes of Bhutan’s trade classification (BTC) exempted from the statutory GST rate under Schedule IV, C, of the GST law). - Electricity and telecommunications sectors will be subject to the GST. - Implementation effects: - Will drastically streamline exemptions and unify rates, greatly facilitating implementation and reducing administrative costs. - Expected to boost compliance. - Revenue impact depends on whether compliance improvements and broader base offset the lower rate: - Authorities’ estimates (assuming a significant improvement in compliance): revenue yield of 0.9 percentage points of GDP relative to the sales tax. - Assuming more modest improvements in compliance: expected loss of revenue about 0.2 percentage points of GDP. ### Excise tax law - Streamlined list of excisable goods. - Green Tax absorbed into the broader excise tax regime, replacing standalone Green Tax levies. - Streamlining implies reduction of tax rates for products such as vehicles. - Overall expected to be revenue-neutral. ### Income tax reform - Merges business and personal income tax, exempts small taxpayers, and revises PIT brackets. - Lowered income and corporate tax rates. - Introduced a tax on capital income with a relatively high threshold. - Includes provisions allowing the government to enter double taxation agreements with foreign governments. - Fiscal and distributional interactions: - Once fully implemented, medium-term revenue impact expected to be a loss of around 2 percent of GDP compared to the FY2024/25 collection. - Over 75 percent of income taxes are paid by SOEs and will be compensated by higher dividend transfers. - Commencement of new hydro projects will buffer the decline in revenue and further improve direct tax collection starting in FY2029/30. ### Key revenue and fiscal figures (as presented) - 2024/25 — 2029/30 projections (Revenue & Grants; Tax revenue; Direct taxes; Tax on goods and services; Non-tax revenue; SOE dividends; Total Budgetary Grants): - 2024/25: Revenue & Grants 28.4; Tax revenue 15.3; of which direct taxes 10.8; of which tax on goods and serv. 4.2; Non-tax revenue 6.3; of which SOE dividends 1.25; Total Budgetary Grants 6.0 - 2025/26: Revenue & Grants 32.1; Tax revenue 15.3; of which direct taxes 10.8; of which tax on goods and serv. 4.2; Non-tax revenue 7.2; of which SOE dividends 2.7; Total Budgetary Grants 8.8 - 2026/27: Revenue & Grants 30.7; Tax revenue 13.6; of which direct taxes 9.2; of which tax on goods and serv. 4.1; Non-tax revenue 7.2; of which SOE dividends 3.6; Total Budgetary Grants 9.3 - 2027/28: Revenue & Grants 30.4; Tax revenue 13.8; of which direct taxes 9.4; of which tax on goods and serv. 4.1; Non-tax revenue 7.1; of which SOE dividends 3.5; Total Budgetary Grants 9.0 - 2028/29: Revenue & Grants 26.2; Tax revenue 13.7; of which direct taxes 9.3; of which tax on goods and serv. 4.0; Non-tax revenue 7.8; of which SOE dividends 3.8; Total Budgetary Grants 4.2 - 2029/30: Revenue & Grants 27.2; Tax revenue 14.5; of which direct taxes 10.2; of which tax on goods and serv. 4.0; Non-tax revenue 8.6; of which SOE dividends 6; Total Budgetary Grants 3.1 ### Policy implications and recommendations (from the source) - Ensure seamless implementation and close coordination between the Department of Revenue and Customs and the Gelephu Mindfulness City (GMC) authorities to mitigate risks to revenue mobilization. - Use higher dividend transfers from SOEs to offset much of the income tax revenue loss given that over 75 percent of income taxes are currently paid by SOEs. - Leverage the start-up of new hydro projects to improve direct tax collection beginning in FY2029/30. - Strengthen medium-term budgeting (MTB) to: - Reduce expenditure volatility, contain current spending, and improve spending efficiency. - Convert medium-term fiscal projections into binding multi-year ceilings and require reliable multi-year forward estimates and a rolling MTBF. - Complement with periodic wage-setting assessments, spending reviews, specific short-term fiscal targets, enhanced program and performance budgeting, and an improved financial management information system. - Continue implementation of a Treasury Single Account and integrate capital-project appraisal and monitoring. - Manage fiscal prudence and domestic borrowing carefully to limit debt sustainability risks, notably when transitioning to new financing models for hydropower projects; ensure managerial independence, arms-length relations with government, regular audits, and comprehensive reporting by special purpose vehicles. - Strengthen oversight and transparency on SOE operations by applying disclosure requirements similar to publicly-listed companies. *Source: Box 1. Bhutan’s Tax Reforms (1btnea2026001-source-pdf).* ### 36. Growth is expected to remain robust over the medium term, supported by ### Growth is expected to remain robust over the medium term, supported by ### Growth outlook and inflation - With Punatsangchhu II fully operational and investment under the 13th FYP progressing, medium-term activity will be driven by rising electricity production and a steady recovery in services, including tourism. - Inflation is projected to stabilize around 4 percent, anchored by the currency peg and the high import content of investment. ### Fiscal policy and public debt - A gradual but sustained fiscal consolidation is appropriate to: - achieve the authorities’ medium-term deficit target, - allow for pro-growth capital expenditure, and - put public debt in a downward trajectory. - Authorities have committed to a fiscal deficit of 3 percent over the FYP. - Key fiscal policy points and recommendations: - Indirect tax revenue buoyancy stemming from the reform will likely stall. - Higher GST rates, which remain low for international standards, together with measures such as the introduction of fuel taxes, and tighter expenditure discipline, are essential to support fiscal objectives while allowing space for spending priorities, including pro-growth capital spending. - The new financing model for hydropower projects brings opportunities to materialize production potential but must be properly managed to mitigate fiscal risks. ### Monetary policy and liquidity management - Monetary policy needs to be gradually normalized to support reserve accumulation, supported by a strengthened monetary policy framework. - Excess liquidity should be absorbed to moderate credit growth and reinforce monetary transmission, including by supporting development of the interbank market. - The implementation of the domestic liquidity management framework is key to improving short-term liquidity management. - Staff encourages the authorities to move forward toward establishing an interest rate corridor. ### Financial sector resilience and supervision - Adoption of Bhutanese accounting standards will introduce an expected-credit-loss approach, requiring higher provisioning particularly for restructured loans. - Authorities are focusing on: - timely recognition of credit risk, - enforcement of prudential norms, - mitigation of concentration risks in tourism and housing. - Recommended continued actions: - strengthen risk-based supervision, - enhance stress testing, - take prompt corrective actions to preserve system soundness. - AML/CFT framework: efforts to strengthen the framework are welcomed, but further improvements are needed—including improvements on prosecution and conviction. ### External position, reserves, and reserve management - Bhutan’s external position strengthened further FY2024/25, leading to a notable increase in international reserves, albeit remaining significantly weaker than warranted by fundamentals and policies. - Strengthening the fiscal and monetary stance is key to continue reducing external imbalances and build up reserves. - This would mitigate risks from export concentration, reliance on external financing, grants and swap arrangements. - The authorities remain committed to increasing reserves further. - The Royal Monetary Authority has undertaken significant steps to enhance transparency and governance in reserve management, including a comprehensive internal control assessment of foreign exchange and reserve management systems. - They are also working towards implementing the recommendations of recent Fund capacity development mission on reserve management. ### GMC, diversification, and regulatory risks - The GMC aims to attract private investment and promote diversification, but the legal framework governing its status versus the rest of Bhutan remains at an early stage and needs further clarity on labor, goods, and capital mobility. - Financial risks arise from differences between the RMA’s regulations and those adopted by the GMC, raising concerns about regulatory and licensing arbitrage and passporting risks. - GMC adoption of Abhu-Dhabi Global Market regulations is a positive step towards addressing AML/CFT vulnerabilities, but complementary laws and strong implementation remain critical. - With crypto-asset activities permitted in the GMC, strong enforcement and supervision are particularly important. - Fiscal risks need careful management to protect Bhutan’s revenue base and limit spending pressures to ensure the GMC’s potential to foster economic diversification and attract FDI fully materializes. *Content unit: 1btnea2026001-source-pdf - 36.* ### 42. Staff recommends that the next Article IV consultation with Bhutan takes place on a 12- ### 42. Staff recommends that the next Article IV consultation with Bhutan takes place on a 12-month cycle. ### Real sector developments - Post-pandemic recovery was slower than peers; growth in 2023–24 was driven mainly by net exports, with consumption steady and investment rebounding in 2024 after a dip in 2023. - Inflation dynamics: - Inflation declined in early 2024 as the impact of the June 2023 wage increase dissipated and food prices eased. - Inflation in Bhutan continues to broadly track India’s price dynamics. - Labor market: - Unemployment has gradually declined since its 2022 peak, but youth unemployment remains high. - Since 2019, employment held broadly steady for men but fell sharply for women, reflecting a significant drop in female labor force participation. - Key macro aggregates (selected values from Table 1): - Real GDP growth (percent change): 2019/20 -2.5; 2020/21 -3.3; 2021/22 4.8; 2022/23 5.0; 2023/24 4.2; 2024/25 6.8; 2025/26 7.4. - Consumer prices (EoP; percent change): 2024/25 3.7 (EoP); consumer prices (avg) 2024/25 3.5. ### Fiscal developments - Revenue and grants: - Tax revenue has recovered recently, but delays in GST implementation have structurally hindered indirect taxes. - Nontax revenue and grants have decreased. - Expenditure: - Current expenditure has declined mostly due to the unwinding of Covid support measures. - Capital expenditure declined in FY2023/24 as the 12th FYP came to an end. - Fiscal balances and debt: - The fiscal deficit improved markedly, in part due to low capital expenditure. - Public debt steadily declined post-pandemic until hydro debt increased in FY2024/25. - Key fiscal ratios (in percent of GDP, Table 3 and Table 1): - Total revenue and grants: 2023/24 28.4; 2024/25 32.1. - Domestic revenue: 2023/24 21.5; 2024/25 21.6. - Tax revenue: 2023/24 15.3; 2024/25 15.3. - Overall balance (percent of GDP): 2019/20 -1.8; 2020/21 -5.8; 2021/22 -7.0; 2022/23 -4.7; 2023/24 -0.2; 2024/25 -2.6. - General government debt (percent of GDP): 2019/20 126; 2020/21 134; 2021/22 129; 2022/23 126; 2023/24 119; 2024/25 118; 2025/26 123. ### Financial and monetary developments - Credit dynamics: - After a period of tepid growth, credit is accelerating again. - Private credit growth (percent change, Table 1): 2023/24 3.2; 2024/25 11.3. - Banking sector soundness and liquidity: - Capital adequacy and asset quality have remained broadly stable; banks continue to hold ample liquidity. - Non-performing loans and capital ratios (Table 6) show resilience: Financial sector Risk-Weighted Capital Adequacy Ratio 2024/25 16.3; Non-Performing Loans (including write-offs) 2024/25 8.6. - Supervisory attention: - Pressures may arise as doubtful loans can no longer be deferred, and more stringent provisioning is envisaged for 2026. - Monetary aggregates (selected, Table 5): - Broad Money (M2): 2018/19 113,530; 2019/20 130,459; 2023/24 210,364 (in millions of ngultrum, end of period). - Claims on private sector (in millions of ngultrum): 2018/19 105,314; 2019/20 120,957; 2023/24 178,574. ### External sector developments - Exchange rates and reserves: - REER and NEER trends diverged in the first half of 2025 as inflation remained subdued despite a nominal depreciation. - Reserves staged a significant recovery in FY2024/25 but remain well below the pre-pandemic peak. - Current account and trade: - The current account deficit remains wide, driven primarily by goods exports, with services exports increasingly acting as an offset. - Current account balance (percent of GDP, Table 4): 2019/20 -14.8; 2020/21 -11.2; 2021/22 -29.5; 2022/23 -35.0; 2023/24 -20.7; 2024/25 -19.2. - Trade balance (goods, percent of GDP): 2024/25 -24.7. - External debt and debt service: - Gross external debt has declined over the last two years, but debt service remains elevated. - External debt (percent of GDP, Table 4 memorandum): 2024/25 111.0. - Trade composition and concentration: - Services continue to be the main driver of export growth. - Export concentration remains critically high, with India as the dominant trade partner. ### Hydropower sector developments - Sector role: - The electricity sector continues to dominate exports, though its share of GDP has fallen. - Hydropower generation, which had decreased for a few years, recovered in 2024. - Demand and pricing: - Rising domestic demand amid stagnant generation has reduced electricity exports. - Surging high-voltage demand—likely from crypto mining—has driven electricity use; a shift to lower-priced domestic sales cut revenues. - Hydropower statistics (Table 1 and Figure notes): - Hydropower exports (percent of GDP): 2019/20 12.1; 2020/21 14.6; 2021/22 11.3; 2022/23 8.5; 2023/24 5.8; 2024/25 6.9; 2025/26 8.6. ### Policy recommendation and forward-looking notes - Staff recommendation: - The next Article IV consultation with Bhutan should take place on a 12-month cycle. - Areas for policy focus implied by the analysis: - Advance GST implementation to strengthen indirect tax collection. - Monitor banking sector asset quality and implement envisaged stricter provisioning for 2026. - Manage fiscal space by prioritizing capital expenditure and containing current expenditure as pandemic support measures unwind. - Address export concentration risks and diversify export base beyond hydropower and India reliance. *Source: IMF staff report excerpt for Bhutan (figures, tables, and text as provided).* ### Annex I. Crypto-Mining Operations in Bhutan ### Annex I. Crypto-Mining Operations in Bhutan ### Background and Recent Developments - Bitdeer partnered with DHI and rapidly expanded crypto-mining capacity over the past year, leveraging Bhutan’s low-cost hydropower and cool climate. - Operational timeline and capacities: - Mid-2023: a 100 MW mining data center in Gedu became operational. - A 500 MW facility started operations at Jigmeling and became fully operational by October 2025. - In addition to Jigmeling and Gedu, four state-run mining sites operate nationwide. - Financial exposure and revenue sharing: - Bhutan faces limited financial risk in the Bitdeer-DHI venture while earning a portion of mining revenues and gaining a few local jobs. - State Bitcoin holdings and valuation: - Boosted by the 2024–25 price boom, Bhutan’s remaining crypto holdings likely exceeded 10,000 BTC (worth over US$1 billion) as of mid-2025. - This made Bhutan the sixth largest government Bitcoin holder in the world and the most significant as a share of GDP at close to 40 percent. - Based on Arkham’s data, state bitcoin holdings as of November 24th amounted to about US$550million, reflecting a reduction of 43 percent in holdings and a 22 percent decline in the price of bitcoin since mid-September. - Energy implications: - In 2023, domestic electricity usage surged by over 60 percent (driven by new industrial loads from crypto mining). - Power exports to India dropped by about a third in 2023. - Electricity imports surged during the dry winter months to meet internal demand. ### Challenges and Risks - Price volatility and financial risk: - Bitcoin is highly volatile: in 2022 Bitcoin fell by over 75 percent; the November 2025 sell-off led to a 17½ percent decline. - A severe downturn could sharply erode crypto asset value, cut mining revenues, and potentially strain GDL repayments to the RMA. - Mitigants: Bhutan benefits from low energy costs; GDL has a stop-loss strategy; past budgetary transfers of crypto-mining profits to finance wage-bill increases were temporary and are no longer envisaged for this fiscal year. - Operational risks and energy management: - Heavy power usage requires careful management given hydropower seasonality. - Policy: consumers and other industries have priority access to electricity over crypto mining. - Operational flexibility: crypto mining is made flexible to account for additional cost of energy imports during the dry season; the Jigmeling facility is set to power down in winter. - Regulatory risks: - Authorities maintain a cautious stance: crypto asset on-ramping is not allowed in Bhutan; the RMA confines crypto activities to a special regulatory sandbox with strict conditions. - With on-ramping allowed in the GMC and sector growth, the government will need clearer laws and guidelines, including anti-money-laundering rules, consumer protection, and integration with other financial regulations to avoid loopholes or vulnerabilities. - Cybersecurity risks: - Managing a large digital asset portfolio raises stakes for cybersecurity; breaches or loss of keys could have significant financial repercussions, necessitating robust physical and digital security investments. ### Accounting of Crypto Assets Without a Corresponding Liability in Balance of Payments - Recording shortcomings: - Large operations by GDL and Bitdeer are not fully recorded in Bhutan’s statistics; some operations (e.g., imports of mining equipment) are recorded, but crypto asset operations are not properly reflected. - Staff stress the importance of recording crypto asset operations in national statistics, including the balance of payments (BOP). - Classification principles (no global consensus; staff description): - Broad consensus: crypto assets are a non-financial asset; debate persists on whether they are produced or non-produced. - If classified as produced non-financial: - Service Exports: mining for foreign entities is recorded under computer and information services. - Acquisition of Crypto Assets: newly mined crypto without a corresponding liability is recorded in the capital account as non-produced non-financial assets. - Sales and Transfers: sales to non-residents affect the financial account; transfers to the monetary authority are recorded as reserve asset changes. - Valuation Changes: price changes affect the International Investment Position (IIP), not the current account. - The authorities consider that produced non-financial is a more adequate classification but are waiting for international consensus to emerge. - Illustrative transactional mapping (Table 1 summary): - Example sequence (mapped to BOP line items): - T: Miner earns $10 in fees and $90 in block rewards; bitcoin payments kept in a foreign account; electricity cost: $80. - T+1: Bitcoin price rises by 25%. No mining or trading occurs. - T+2: Miner sells $80 worth of Bitcoin to a non-resident to pay for domestic electricity; pays $3 validation fee. - T+3: Miner sells $10 worth of Bitcoin to a non-resident and transfers proceeds to the monetary authority, increasing reserves. - BOP mapping highlights: - Capital account entry for acquisition of non-produced nonfinancial assets: 100 / 83 / 10 (illustrative mapping in table). - Financial account reserve assets increase by 10 when proceeds are transferred to the monetary authority. - Valuation changes reflected in the IIP (reserve assets, other investment entries noted). *Source: Annex I. Crypto-Mining Operations in Bhutan (extracted from the provided PDF content).* ### 19.2 percent of GDP, relative to 37 percent of ### 19.2 percent of GDP, relative to 37 percent of GDP in FY2022/23. ### Current Account and Assessment - FY2024/25 current account balance: 19.2 percent of GDP. - Drivers of improvement since FY2022/23: pickup in remittances, tourism revenues, and hydro exports. - Medium-term outlook: current account expected to stabilize around current levels, with pressure from high imports (primarily in the hydropower sector) balanced by fiscal consolidation and continued increases in tourism and electricity exports. - EBA-lite assessment: - CA norm (regression method) estimated deficit: 8.8 percent of GDP. - Actual CA deficit implied to be around 10.5 percentage points too large relative to the CA norm. - Relative policy gap accounts for around two-thirds of this gap: 6.7 percentage points of GDP, reflecting capital controls and an expansionary fiscal stance. ### Real Exchange Rate (REER) - Nominal anchor: ngultrum pegged at par to the Indian rupee; peg provided nominal stability through FY2024/25. - REER behavior: broadly stable since the pandemic with only modest fluctuations; calculated using consumer prices and trade-weighted partner currencies. - Policy implications: peg limits exchange rate as a tool for external adjustment; sustaining the peg requires maintaining sufficient foreign exchange reserves and aligning fiscal and monetary policies to avoid persistent REER misalignments. - Assessment via EBA-lite methodologies: - CA-based REER assessment: REER remains significantly overvalued by about 41 percent relative to levels consistent with medium-term fundamentals and desirable policies. - Caveats: structural characteristics (electricity exports invoiced in Indian rupees; imports influenced by large-scale infrastructure projects) reduce current account responsiveness to exchange rate changes, implying lower elasticity than diversified economies. - REER-based model result: small negative gap of 2.6 percent; reliability limited for Bhutan given dominance of India as trading partner and the currency peg. ### Capital and Financial Accounts: Flows and Policy Measures - Capital account (FY2024/25): inflows of US$465 million (13.6 percent of GDP), up from 7.3 percent of GDP in the previous financial year. - Composition: mainly budgetary grants and bitcoin export revenues. - Net financial account inflows (FY2024/25): US$841 million (25 percent of GDP). - Composition: net direct investment of US$111 million; net other investment inflows close to US$500 million, primarily long-term rupee-denominated loans and sovereign borrowing for infrastructure. - Assessment and outlook: - Capital account expected to remain robust, supported by grant inflows from India to help fund the 13th Five Year Plan and other development partners. - Medium-term financial account inflows projected to rise, driven by disbursements for hydropower and other major development initiatives. - Given concessional terms and long-term, FDI-like structure of associated liabilities, likelihood of external financing pressures from capital flows assessed as low in the near and medium term. ### FX Intervention and Reserves Level - Reserves level: - End of FY2024/25: US$806 million, up from US$624 million at end of previous financial year. - Reserves in months of total imports: 5.2 months of total imports. - Historical peak: US$1.3 billion in FY2019/20 (before reserves were loaned to SOEs to kickstart crypto investments). - Projections and risks: - Reserves projected to recover to peak levels as balance of payments outlook improves and loans are repaid over the next couple of years. - Significant risks remain, notably linked to fluctuations in bitcoin prices. - Assessment: - At 5.2 months of imports, reserves remain below the adequacy metric for credit constrained economies, assessed to be in the region of 7 months of imports for Bhutan. - Additional buffers desirable given uncertainty in financing the structural BOP deficit for the medium term and reliance on swap arrangements and other borrowing facilities. ### Risk Assessment Matrix — Selected Risks, Likelihood, Impact, and Policy Responses - Domestic risks: - Hydropower project delays: Likelihood Medium. Impact: could lower exports and hinder output and external and fiscal balances. Policy: broaden tax base, improve tax administration, diversify the economy. - Large-scale initiatives such as GMC initiative: Likelihood Medium. Impact: potential fiscal, financial and environmental risks. Policy: rigorous cost-benefit and environmental assessments before implementation. - Crypto-mining expansion: Likelihood Medium. Impact: macro-financial implications, especially under state-led models with public investment and crypto asset holdings. Policy: enhance governance and transparency; assess balance-of-payments risks and fiscal exposure. - External risks: - Escalating trade measures and prolonged uncertainty: Likelihood High. Impact: while direct impact of higher U.S. tariffs on Bhutan expected to be limited, escalation in tariff rates faced by India could have significant indirect effects on Bhutan. Policy: strengthen diversification (energy sources including solar and trade partners), maintain adequate reserves, and develop contingency plans. - Commodity price volatility: Likelihood High. Impact: higher fuel prices would hinder the external balance (Bhutan imports fuel for transportation and electricity during the dry season). Policy: strengthen energy diversification, maintain adequate reserves, avoid delays on hydro projects, and revisit domestic electricity prices. ### Uptake of Previous IMF Advice — Key Progress and Remaining Gaps - Fiscal reforms: - New GST bill passed: flat rate of 5 percent; extends GST to electricity. - Exemptions limited to essential food (rice, oils, salt), sanitary towels, and carriages for disabled persons. - Observation: Bhutan’s 5 percent GST rate is among the lowest in the Asian and Pacific region; a higher rate closer to 7 percent would better support medium-term revenue mobilization. - Repeal of Excise Equalization Tax from GST bill and introduction of standalone Excise Bill; green tax merged into new Excise Tax. - Revised Income Tax Act includes detailed regulations for insurance companies. - Implementation needs: ensure tax offices adequately staffed and tax officers properly trained on administrative and compliance processes. - Monetary policy and liquidity management: - Progress modest on tightening monetary policy; staff recommended moving to neutral and raising the CRR to pre-pandemic level of 10 percent, but CRR remained at 8 percent. - RMA has begun actions for market-based operations (Domestic Liquidity Management Framework — DLMF) supported by Fund CD; liquidity operations through OMOs planned for March 2026. - Recommendation to publish a regular government securities issuance calendar remains outstanding. - Monetary easing in India and the peg have effectively loosened overall policy stance. - External vulnerabilities and crypto: - External vulnerabilities remain, including crypto-related operations and hydropower reliance. - Fiscal tightening stronger than envisaged in last Article IV; monetary tightening has lagged. - RMA ban on on-ramping of crypto assets mitigates some risks; GIDC repayments to RMA still subject to crypto valuation risks. - Financial sector prudential norms and AML/CFT: - Prudential Regulations 2024 effective July 1, 2024: stricter norms on credit concentration including 150 percent risk weight for exposures exceeding 30 percent of a bank’s loan portfolio to any single sector. - April 2025 engagement with the EU AML/CFT Global Facility for technical assistance on preventive measures, intelligence-to-evidence tools, and risk-based supervision. - Statistics and capacity building: - National accounts now available quarterly; GDP estimates by production approach published at both current and constant prices. - Labor statistics frequency enhanced from annual to quarterly; national accounts, CPI and PPI rebased. - Fund capacity development (CD): - Fund CD supported GST and excise reforms, revision of Income Tax Act, development of DLMF, and measures to enhance budget credibility and AML/CFT framework (including national risk assessment). - Resident Tax Administration Advisor installed at Ministry of Finance since 2023. ### Fund Relations and Exchange Rate Arrangements (selected items) - Membership: Joined September 28, 1981; Article XIV. - Quota and holdings (SDR Million; Percent of Quota): - Quota: 20.40 (100.00). - Fund Holdings of Currency (Exchange Rate): 15.85 (77.72). - Reserve Tranche Position: 4.55 (22.29). - Exchange rate arrangement: - Since 1974, ngultrum pegged at par to the Indian rupee; classified as a conventional peg. - Bhutan avails transitional arrangements under Article XIV, Section 2, maintaining exchange restrictions related to foreign exchange balancing requirements on remittances and availability of FX for importers monitored by the Bhutan Trade Fin-Net System (BTFN). - Exchange restrictions subject to Fund approval under Article VIII, Section 2(a) include foreign exchange balancing requirements for imports of capital goods and primary raw materials for certain projects, requiring FDI companies to pay operational expenses from their own foreign exchange resources, and requiring Bhutanese companies to pay interest and amortization of external loans from their own foreign currency resources. - Liberalization measures: Foreign Exchange Rules and Regulations (FERR) 2022 and External Commercial Borrowing Guidelines 2023 permit residents and non-residents to open foreign currency accounts with authorized banks in Bhutan; non-residents can open domestic currency accounts; under ECB guidelines borrowers need not earn foreign currency to be eligible for external borrowing if loan is from multilateral credit institution and repayment liability fixed in Ngultrum. - INR travel allowance for Bhutanese tightened from INR 30,000 during pilgrimage season and INR 10,000 per month at other times, to INR 25,000 semi-annually. - Article IV consultation: Bhutan on a 12-month consultation cycle; 2024 Article IV concluded September 9, 2024. ### Debt Sustainability Assessment — Key Conclusions and Coverage - Risk of external debt distress: Moderate. - Overall risk of debt distress: Moderate. - Granularity: Limited space to absorb shocks. - Application of judgment: Yes — mechanical results indicate high risk but judgement applied due to mitigating factors. - Rationale: - Most outstanding public and publicly-guaranteed debt linked to hydropower project loans from the Government of India under intergovernmental agreements where the Government of India covers financial and construction risks and commits to buy all surplus electricity at cost-plus margin. - New hydro projects envisaged as joint ventures with private sector and expected to include risk mitigation mechanisms. - Bhutan assessed to have limited space to absorb additional shocks, particularly export shocks. - Policy recommendations to reduce debt distress risk: - Robust fiscal consolidation underpinned by revenue mobilization. - Maintain a stable peg with the Indian rupee. - Implement reforms to improve productivity and competitiveness of the non-hydropower sector. - Enhance debt management. - Public debt coverage in DSA: - Coverage includes public and publicly-guaranteed (PPG) debt covering the non-financial public sector and the central bank, including central government and RMA debt (such as standby credit facilities from the Government of India and bilateral swap lines guaranteed by the government). - Includes non-financial SOE debt, both external and domestic; His Majesty’s Secretariat liability to the RMA from the Central Bank of Kuwait deposit included as domestic debt. - SPVs formed for financing new hydro projects (Khorlochhu and Dorjilung) are excluded consistent with exclusion conditions in Annex 3 of LIC-DSA Guidance Note and given mitigating factors; a shock of 25 percent of GDP is included to account for commercial debt taken by SPVs proportional to DGPC’s equity stake. - Contingent liability calibration includes National Credit Guarantee Scheme outstanding amount as of end-June 2023 (0.2 percent of GDP), preserves default financial market risk value (5 percent of GDP), and includes additional 2 percent of GDP for PPPs (estimated as 35 percent of their capital stock from World Bank database). _Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA)_ ### 2. After increasing markedly in the aftermath of the COVID-19 pandemic, the public ### 1btnea2026001-source-pdf - 2. After increasing markedly in the aftermath of the COVID-19 pandemic, the public ### Public debt trends and drivers - Public debt increased from 74.8 percent of GDP in FY2011/12 to 134.3 percent of GDP in FY2020/21. - The increase to FY2020/21 was driven in part by: - a marked decline in GDP during the pandemic, - a guaranteed bilateral swap line with the Reserve Bank of India, - new hydropower projects, primarily in the context of bilateral agreements with India. - Since FY2020/21, the public debt-to-GDP ratio has steadily declined, driven by strong fiscal outturns and GDP growth. - Domestic debt rose from 4.5 percent of GDP in FY2011/12 to over 10.3 percent of GDP in FY2024/25, reflecting: - development of the domestic debt market, - the need to finance larger deficits during the COVID-19 pandemic amid falling tax revenues and mounting spending pressures. - Public and publicly guaranteed (PPG) debt stood at 118 percent of GDP at the end of FY2024/25. - External debt accounted for 91 percent of total debt. - Hydropower debt comprised 55 percent of the external debt stock at end-FY2024/25. - 64 percent of total debt is owed to bilateral creditors and 25 percent is owed to multilaterals. - 69 percent of PPG external debt was denominated in Indian rupees. ### Composition, consolidation, and contingent liabilities - External non-hydro debt as a share of GDP increased since FY2018/19 to help finance infrastructure projects (urban development, rural electrification, agriculture). - Domestic debt composition: mostly treasury bills and bonds held primarily by domestic banks, insurance companies, and the public pension fund. - Public sector debt is consolidated to remove intra-public sector lending, including: - NPPF’s holdings of treasury bills and bonds (Nu. 2.8 billion), - loans to SOEs (Nu. 2 billion), - RMA’s holdings of bonds issued by Green Digital Limited for US$539 million, - a loan from the central government to Drukair for Nu. 2.7 billion. - Tailored contingent liability inputs used in the DSA (percent of GDP): - Other elements of general government not captured in 1.: 0.2 (Outstanding amount of the National Credit Guarantee Scheme as of Jun 2023). - SoE's debt (guaranteed and not guaranteed): 1/2 percent of GDP25 (To account for non-guaranteed SPV debt). - PPP: 35 percent of PPP stock2.04. - Financial market (default minimum): 5 percent of GDP5. - Total (2+3+4+5): 32.3 percent of GDP. - Subsector coverage: The entire public sector, including SOEs. ### Hydropower-related debt and risk characteristics - Hydropower-related debt from the Government of India is characterized as akin to foreign direct investment (FDI). - India’s financing under intergovernmental agreements guarantees returns from electricity exports and mitigates risks: - The Government of India bears construction and financial risks and commits to buy all surplus electricity at a purchase price set at cost plus a margin. - The price of electricity is set at project commissioning and revisited every three years to incorporate changes in costs. - Debt service begins only after project commissioning; interest during construction is capitalized upon commissioning. - Hydropower projects are insured (and re-insured) against natural disasters. - Exchange rate risks are mitigated because electricity export receipts and hydropower debt services are denominated in Indian Rupees, to which the Ngultrum is pegged. - Debt default concerns are mitigated because the creditor is also the project’s main client. - Conclusion: Risks associated with hydropower-related debt are largely mitigated. ### Box 1 — Bhutan’s Hydropower Projects (summarized project status and implications) - Punatsangchhu-I: - 1,200 MW; construction continues after geotechnical delays. - Revised timelines point to completion by FY2028/29, though risks remain elevated. - Punatsangchhu-II: - 1,020 MW; began operations in December 2024 under a bilateral agreement with India. - All six turbines were commissioned during FY2024/25. - Fully commissioned Puna-II projected to add nearly 3 percentage points to GDP growth and significantly boost electricity exports. - Nikachhu: - 118 MW; achieved full commissioning in April 2024 and began power exports to India. - Sunkosh: - 2,585 MW; in preparatory phase, financing and design negotiations ongoing. - Construction and operation expected to begin in December 2028 and December 2034, respectively. - Not included in the DSA given preliminary nature; to be included in future DSAs once clearer. - Dorjilung: - 1,125 MW; preparatory phase with financing discussions ongoing; envisioned as key long-term project. - Khorlochhu: - 600 MW; construction began January 2025 under a joint-venture between Druk Green Power Corporation and Tata Power. - Planned full commissioning in 2030. - Project modalities and financing: - Punatsangchhu-I and -II financed through an intergovernmental (IG) agreement with the Government of India, mitigating financial and construction risks. - New projects (notably Khorlochhu and Dorjilung) conducted under joint ventures with private investors (DGPC partnered with TATA power for a 60:40 ownership structure). - Part of the cost of these projects will be financed through non-recourse commercial debt. ### Assumptions and macroeconomic projections underpinning the 2025 DSA - Near-term growth drivers: - Full commissioning of hydropower projects, - Higher capital spending under the 13th Five Year Plan (13th FYP), - Hydropower exports and tourism supporting medium-term growth, - Gradual decline in the current account deficit. - Risks to reserves: - International reserves assumed to be used to repay the BSL and expected to increase short to medium term. - Assumes repayment of FX bonds associated with crypto mining operations from Green Digital Limited (GDL) to the RMA as scheduled. - Crypto price volatility might pose risks to reserve accumulation; extent uncertain due to limited information on crypto mining operations and holdings. - Key baseline macroeconomic assumptions (Text Table 1 and Text Table 2 excerpts): - Real GDP growth: - Growth in FY2024/25 expected to accelerate to 6.8 percent (compared to 4.2 percent in FY2023/24). - Medium-term growth projected at 6.2 percent. - Long-term growth projected around 5 percent. - Inflation: - Expected to decline towards 4 percent in the medium term; inflation declined from 8.2 percent in FY2020/21. - GDP deflator assumed to move in tandem with inflation after adjusting for exchange rate depreciation. - Fiscal balance: - General government fiscal deficit projected around 3 percent of GDP in FY2025/26 (from 2.6 percent of GDP in FY2024/25). - Primary balance of around 0.2 percent of GDP expected in the long run. - Strong FY2024/25 outturn driven by one-off improvements in non-tax revenue and a decline in capital expenditure due to low execution. - Investment spending expected to recover and widen the deficit over the medium term. - Revenues net of grants expected to increase because: - hydropower revenues expected to increase in FY2025/26 with commissioning of Punatshangchhu II, - pickup in tourism increasing Sustainable Development Fee (SDF) revenues. - Full implementation of the Goods and Service Tax (GST), slated for January 2026, expected to improve system efficiency but have a small negative impact on tax revenue. - External grants projected to increase as 13th FYP proceeds, driven by India’s commitment for grants amounting to Nu. 100 billion and access to IDA financing on small economy terms (50 percent grant and 50 percent credit). - Revenue expected to decline temporarily over the medium-term as external grants from India fall towards the end of the 13th FYP, recovering once hydroelectric plants come online. - External balance: - Non-interest current account deficit (CAD) narrowed to -17.1 percent of GDP in FY2024/25 (after reaching -33.4 percent of GDP in FY2022/23). - CAD expected to average around 14 percent of GDP over the medium term. - Long-run CAD expected to average 6.5 percent of GDP thanks to pickup in electricity exports, export diversification, and a decline in imports following hydropower completion. - Changes in CAD relative to previous DSA partly reflect differences in recording crypto exports in the BoP. - Financing mix and debt cost: - External loans (IDA, ADB, EIB, IBRD, IFC, Government of India for hydro projects, commercial creditors) expected to finance around 64 percent of annual gross financing needs on average over the medium term; remainder financed by domestic borrowing. - Recent domestic T-bill auction rates around 4 percent; most recent T-bond auction resulted in 6 percent for a 2-year bond issued in November 2023. - Long term: share of domestic financing expected to increase and average 59 percent of annual gross financing needs, with shift from short-term T-bills to medium- and long-term bonds. - Cost of domestic debt assumed to be 7.5 percent for longer-dated bonds. - Share of concessional external debt expected to decline over the long term as Bhutan develops. - Additional realism tool findings: - The 3-year adjustment in the primary balance is lower than the top quartile of comparable LICs under IMF-supported programs since 1990. - Growth would be slightly lower compared to alternative assumptions on fiscal multipliers. - Contribution of government capital to GDP growth assumed low and similar to previous DSA; relative contribution used in realism tools: 4 percent versus historical period 19 percent. - Increase in public debt over next five years driven by other debt-creating flows reflecting outlays associated with hydropower projects. *Source: Bhutan authorities and IMF staff estimates as presented in the provided DSA excerpt.* ### 8. Bhutan’s debt carrying capacity (DCC) is assessed to be strong. The Composite Indicator (CI) is ### Bhutan’s debt carrying capacity (DCC) and debt sustainability ### Debt carrying capacity (CI) and classification - DCC assessed as: Strong - Composite Indicator (CI) basis: - Weighted average of factors: real GDP growth, remittances, international reserves, world growth, and the World Bank CPIA score - CI calculated based on the April 2025 World Economic Outlook (WEO) and the 2024 World Bank Country Policy and Institutional Assessment (CPIA) data - Classification history (current and previous vintages): Strong ### Applicable thresholds (DSA framework) - External debt burden thresholds: - PV of external debt to exports: 240 - PV of external debt to GDP: 55 - External debt servicing thresholds: - Debt service to exports: 21 - Debt service to revenue: 23 - Total public debt benchmark: - PV of total public debt in percent of GDP: 70 ### External debt sustainability — baseline and projections - Baseline dynamics and key ratios: - External debt-to-GDP (overall) trajectory: - Around 111 percent in FY2024/25 - About 150 percent by FY2028/29 (medium term) - Decrease to 97 percent by 2035/36 - Further decline to about 40 percent by FY2045/46 (long term) - External PPG debt-to-GDP: - 107 percent in FY2024/25 - About 123 percent in the medium term - Decline to about 35 percent in the long term - Threshold breaches and timing: - PV of debt to GDP ratio would exceed the threshold until FY2039/40 - PV of debt to exports would fall sustainably below the threshold in FY2035/36, reflecting a projected pick-up in hydro-related exports - Debt service to exports ratio: would breach thresholds in the initial years, and then from FY2028/29 to FY2044/45 - Debt service to revenue ratio: would fall below its respective threshold only from FY2045/46 - Short-term liquidity pressure driver: - Initial increase in debt service due to expected repayment of RMA’s bilateral swap line with the Reserve Bank of India (part already repaid at time of DSA) ### Stress-test results and scenarios - Exchange rate shock: - Exercise assumes a 30 percent nominal depreciation of the domestic currency in the first year of the projection period, or the size needed to close the estimated real exchange rate overvaluation gap, whichever is larger - Overvaluation gap estimated at over 40 percent; exercise assumes conservative value of 50 percent - Effects: - Could increase value of external liabilities (largely foreign-currency-denominated) - Because most external debt is denominated in rupees (to which the ngultrum is pegged), risk is not judged significant - Under shock, PV of debt-to-GDP ratio would fall below thresholds only a couple of years later than in the baseline - Debt service to exports ratio would stay above the threshold until FY2043/44 - Debt service to revenue ratio would remain above the threshold over the projection horizon - Export shock: - Would deteriorate repayment capacity; PV of debt to exports ratio and debt service to exports ratio would be above thresholds until FY2041/42 and over the entire projection horizon, respectively - Export shocks could stem from delays in commissioning or construction of hydropower projects - Historical scenario: - Based on 10-year historical averages; yields higher future gross financing needs and total PPG debt levels and is considered not an adequate forecast relative to baseline - Non-FDI-like external debt assessment: - Excluding hydro debt linked to intergovernmental projects with India (IG), PV of external debt to GDP remains broadly stable below 50 percent (below the threshold of 55 percent of GDP) - Thresholds marginally breached under some stress tests - Swap line repayment impacts: - Half of the June 2025 swap balance already repaid by the RMA - Remaining balance: FY2025/26 breach in debt service as a share of revenue and exports would be marginal (about 1 percent) - For FY2026/27, breach is only in debt service to revenue and is marginal (about 1 percent) - If swap line is renewed at current levels after FY2026/27, there are no further breaches under the baseline - Reserves: - Reserves expected to remain above 60 percent of the standard adequacy metrics after these payments ### Public and domestic debt dynamics - Public debt: - PV of debt to GDP would exceed the public debt threshold until FY2040/41 under the baseline - Under stress scenarios, PV of debt to GDP would be exceeded until at least FY2040/41 (primary balance, exports, other flows, and combination of shocks) - PV of debt to GDP could exceed the threshold even by FY2045/46 in the case of real GDP growth and depreciation shocks - PV of debt to revenue ratio expected to increase over the medium term, then decline after hydropower projects are commissioned - Debt service-to-revenue ratio expected to show an inverted-U dynamic correlated with commissioning and repayment timing of new hydropower plants - Domestic debt: - Projected to fluctuate around 19 percent of GDP over the horizon period - Peaks at 20 percent of GDP in 2032 - LIC median domestic public debt-to-GDP: 17.2 percent - Domestic debt falls below the LIC median when His Majesty’s Secretariat liability to the RMA (Kuwait deposit) is excluded - Risks noted: undersubscription of recent bond auctions highlights need to enhance domestic debt management ### Risk rating, vulnerabilities, and mitigating factors - Risk rating: - DSA assesses Bhutan at moderate risk of external and overall debt distress (same as 2024 DSA) - Mechanical results point to high risk, but judgment applied due to mitigating factors - Key vulnerabilities: - Limited space to absorb additional shocks - Important risks: geopolitical tensions, delays in hydropower completion, persistent external imbalances, materialization of financial sector contingent liabilities - Mitigating factors: - Fifty-five 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 - Commits to buy all surplus electricity at a price reflecting cost plus profits - New hydro projects expected to be less reliant on inter-governmental financing - Project-specific mitigants: - Dorjilung: partnership with TATA power under 60:40 ownership, creation of special purpose vehicle (SPV) DHPL that will take non-recourse commercial debt; this non-guaranteed debt excluded from DSA perimeter based on policies provided to authorities during the 2025 Article IV mission and assessed to satisfy LIC-DSA Guidance Note criteria - Similar treatment expected for Khorlochhu Hydro Power Limited (KHPL) - Exclusions to be reassessed in future DSAs as more information and track record become available - Insurance mechanisms and hydrological risk mitigants are included in IG projects; preliminary information suggests hydrological risk mitigants will be included in new projects (to be further assessed in future DSAs) ### Policy recommendations and priorities - Strengthen fiscal policy and public finances: - Robust fiscal consolidation and revenue mobilization efforts - Timely implementation of the GST - Maintain macro policy stability: - Stable peg with the Indian rupee - Structural and institutional reforms: - Reforms to improve productivity and competitiveness of the non-hydropower sector - Enhanced debt management and domestic debt market development, given undersubscription risks and evolving liabilities *Source: IMF staff Debt Sustainability Assessment for Bhutan (text excerpt).* ### 17. The authorities broadly agreed with staff’s assessment of debt sustainability and the ### 17. The authorities broadly agreed with staff’s assessment of debt sustainability and the need for a gradual revenue-based fiscal consolidation over the medium term. ### Authorities' views and policy intentions - Authorities view the risk of debt distress as moderate despite a relatively high public debt ratio, citing unique mitigating factors supporting the sustainability of Bhutan’s debt stock. - Authorities are seeking new financing models for hydropower projects featuring SPVs and nonrecourse debt designed to insulate the Government of Bhutan (GoB). - Authorities envisage a moderation in the debt-to-GDP ratio over the medium term driven by: - A gradual fiscal consolidation supported by recent tax reforms. - A significant increase in electricity exports and the coming on stream of new hydropower plants. - Authorities reiterated the importance of further developing the domestic bond market as an alternative funding source and to strengthen fiscal-monetary coordination. ### External debt sustainability — Baseline scenario (selected indicators, 2025–2046) - External debt (nominal) (In percent of GDP): - 2025: 111.3 - 2026: 120.8 - 2027: 125.5 - 2028: 130.7 - 2029: 149.2 - 2030: 146.7 - 2031: 138.1 - 2036: 97.0 - 2046: 38.5 - (continued: 111.8, 123.8 appear in same row for later periods) - Of which: public and publicly guaranteed (PPG) (percent of GDP): - 2025: 107.4 - 2026: 112.4 - 2027: 109.7 - 2028: 109.3 - 2029: 122.9 - 2030: 117.1 - 2031: 107.5 - 2036: 77.3 - 2046: 33.1 - (later entries: 108.0, 101.3) - Change in external debt: -1.3, 9.5, 4.6, 5.2, 18.6, -2.6, -8.6, -5.6, -8.8 - Identified net debt-creating flows: 5.6, 6.1, 10.4, 11.2, 8.5, 6.6, 6.7, 4.0, 10.8, 16.6, 4.9 - Non-interest current account deficit (percent of GDP): 17.1, 15.6, 16.6, 16.2, 14.3, 12.5, 11.5, 3.7, 11.7, 20.3, 8.7 - PV of PPG external debt-to-GDP ratio: - 2025: 102.0 - 2026: 104.4 - 2027: 104.5 - 2028: 105.6 - 2029: 114.4 - 2030: 110.4 - 2031: 102.3 - 2036: 72.3 - 2046: 26.1 - PV of PPG external debt-to-exports ratio: - 2025: 311.3 - 2026: 342.4 - 2027: 334.0 - 2028: 337.1 - 2029: 380.2 - 2030: 354.4 - 2031: 331.0 - 2036: 232.9 - 2046: 108.6 - PPG debt service-to-exports ratio: 13.2, 42.7, 24.9, 20.1, 29.1, 30.2, 34.8, 26.2, 17.1 - PPG debt service-to-revenue ratio: 19.3, 55.8, 36.5, 29.5, 39.9, 39.0, 45.1, 34.9, 22.3 - Gross external financing need (Million of U.S. dollars): 627.7, 930.3, 936.8, 973.6, 1,097.0, 1,152.2, 1,284.8, 1,246.2, 3458.6 ### Public sector debt sustainability — Baseline scenario (selected indicators, 2025–2046) - Public sector debt (percent of GDP): - 2025: 117.7 - 2026: 122.8 - 2027: 126.0 - 2028: 125.4 - 2029: 140.6 - 2030: 134.1 - 2031: 126.6 - 2036: 94.9 - 2046: 54.9 - (later entry: 117.3, 118.5) - Of which: external debt (percent of GDP) mirrors external DSA PPG row: - 2025: 107.4; 2026: 112.4; 2027: 109.7; 2028: 109.3; 2029: 122.9; 2030: 117.1; 2031: 107.5; 2036: 77.3; 2046: 33.1; (108.0; 101.3) - Change in public sector debt: -1.0, 5.1, 3.2, -0.6, 15.2, -6.5, -7.5, -4.7, -3.4 - Primary deficit (percent of GDP): 0.7, 1.0, 1.5, 0.3, 1.0, -0.9, -0.2, -0.2, -0.2, 1.9, 0.2 - Revenue and grants (percent of GDP): 28.4, 32.1, 30.7, 30.4, 26.2, 27.2, 26.8, 26.0, 20.8, 27.2, 27.5 - Of which: grants (percent of GDP): 6.0, 8.8, 9.3, 9.0, 4.2, 3.1, 2.9, 2.7, 2.3 - PV of public debt-to-GDP ratio: - 112.6, 115.0, 121.0, 121.9, 132.4, 127.6, 121.6, 90.1, 48.0 (selected years) - PV of public debt-to-revenue and grants ratio: 396.8, 358.5, 394.3, 401.5, 505.9, 468.5, 453.1, 346.4, 231.2 - Debt service-to-revenue and grants ratio: 23.0, 54.1, 40.7, 41.6, 51.4, 53.5, 55.5, 61.1, 54.4 - Gross financing need: 6.0, 40.2, 24.2, 19.1, 35.9, 15.8, 13.7, 12.4, 9.3 ### Key macroeconomic assumptions and projections (selected) - Real GDP growth (percent): 6.8, 7.4, 6.0, 5.8, 6.8, 6.5, 5.8, 5.0, 5.0, 3.7, 5.9 - GDP deflator in US dollar terms (change in percent): 3.1, 3.1, 3.3, 3.4, 3.4, 3.4, 3.5, 3.5, 1.1, 3.4 - Effective interest rate (percent): 2.1, 2.1, 2.2, 2.5, 3.1, 3.0, 3.1, 5.8, 4.3, 1.4, 3.8 - Growth of exports of G&S (US dollar terms, percent): 19.2, 3.0, 12.3, 9.5, 6.0, 14.1, 8.6, 7.4, 8.6, 5.1, 9.0 - Growth of imports of G&S (US dollar terms, percent): 24.9, -0.3, 14.1, 8.0, 2.7, 6.1, 4.9, 11.2, 8.6, 6.1, 6.0 - Grant element of new public sector borrowing (percent): 21.7, 4.3, 14.5, 24.8, 10.8, 14.0, 15.8, 21.5, ... , 14.7 - Government revenues (excluding grants, percent of GDP): 22.4, 23.3, 21.4, 21.4, 22.0, 24.1, 23.9, 23.3, 18.5, 20.1, 22.8 - Aid flows (Million of US dollars): 203.9, 366.0, 434.1, 535.3, 315.2, 263.1, 260.2, 458.4, 777.6 - Grant-equivalent financing (percent of GDP) (selected): 14.5, 9.9, 10.9, 11.6, 4.4, 4.0, 3.7, 2.9, ... , 6.7 - Nominal GDP (Million of US dollars) (selected): 3,411; 3,775; 4,133; 4,519; 4,992; 5,500; 6,022; 9,281; 21,274 - Nominal dollar GDP growth: 10.1, 10.7, 9.5, 9.4, 10.5, 10.2, 9.5, 8.6, 8.6, 4.8, 9.5 ### Stress tests, sensitivity analysis, and risks - Stress testing framework examines multiple shocks: real GDP growth, primary balance, exports, other flows, depreciation, combination shocks, combined contingent liabilities, natural disaster, commodity price shock, and market financing. - The DSA notes that the most extreme stress test is the one yielding the highest ratio in or before 2036; one-off breaches are treated per methodology. - Figure and table results (selected outcomes): - Sensitivity Table (PV of PPG external debt-to-GDP ratio) baseline and alternative scenarios show values such as Baseline 104 (2026), rising under Alternative A1 to 104, 114, 124... and other bound/test scenarios with values frequently exceeding thresholds. - Several scenarios and tailored tests produce breaches of benchmarks for PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue ratios in stressed years. - Note: All additional financing needs generated by stress-test shocks are assumed to be covered by PPG external medium and long-term debt in the external DSA; default terms of marginal debt are based on baseline 10-year projections. ### Key risks and policy implications (drawn from analysis and projections) - Sustaining fiscal consolidation and revenue mobilization is critical to moderate the public debt-to-GDP ratio over the medium term. - Continued ramp-up in electricity exports and timely commissioning of new hydropower plants are central to external debt sustainability outcomes. - Developing the domestic bond market is important to provide alternative financing and strengthen fiscal-monetary coordination. - New financing modalities for hydropower (SPVs and nonrecourse debt) can help insulate public finances but should be assessed for contingent liability implications. - Stress-test outcomes highlight vulnerability to shocks (growth, depreciation, export shocks, contingent liabilities), underscoring the need for buffers and prudent borrowing terms. *Source: Country authorities; and staff estimates and projections.* ### Annex I. Assessment of the Exclusion of Dorjilung Non- ### Annex I. Assessment of the Exclusion of Dorjilung Non-Guaranteed Debt from the Debt Perimeter ### Project description and financing structure - Installed capacity: 1,125 MW. - Joint venture between DGPC (Druk Green Power Corporation) and Tata Power. - Initial shareholding agreement: 60:40 structure (DHPL:TATA). - Special Purpose Vehicle (SPV): Dorjilung Hydro Power Limited (DHPL), registered with the Corporate Regulatory Authority (CRA), Ministry of Industry, Commerce and Employment (MOICE) in Bhutan on December 8, 2025. - Financing mix: - Part of the project covered through IDA grants, and IBRD and IDA loans. - Remainder approximately US$1bn financed through commercial debt. - The WBG will make payments to the SPV’s designated account upon submission of withdrawal applications and Interim Unaudited Financial Reports (IUFR). The IBRD loan for the Project will be directly paid to the DHPL’s designated account. - Rationale for exclusion consideration: initial evidence supports exclusion of DHPL non-guaranteed debt from the 2025 DSA according to Appendix III of the LIC DSF Guidance Note; treatment will be reevaluated in future DSAs as more information and track record become available. ### Managerial independence and governance - Present management: DHPL currently managed by DGPC and governed by the Project Steering Committee (PSC) Members. - Planned autonomy: - DHPL plans to maintain legal and managerial autonomy from RGoB and delink from DGPC in terms of managerial independence and operations. - Structured as a ring-fenced corporate entity with its own balance sheet. - Will have independent Board Members with a Chair appointed through open competition. - Project Implementation Unit (PIU): - DGPC initially established a dedicated multi-disciplinary PIU to prepare DHPL. - PIU staff have worked on other hydropower projects and collaborated with the Bank and DFIs (ADB, JICA). - Following incorporation, PIU staff are becoming SPV staff, complemented by personnel from Tata Power and additional hiring. - Contractual conditions: - IDA financing will become effective upon fulfilment of conditions, including receipt by the Bank of evidence of conclusion of a satisfactory Subsidiary Agreement between RGoB, DGPC and the SPV. ### Relation with the government and regulatory environment - Free Power requirement: - Under section 6.9 of the National Energy Policy, all medium, large, and mega hydropower projects (>100 MW such as Dorjilung), public or private, must provide 13 percent of net electricity generated as Free Power to the RGoB at no cost (acts in practice as a tax). - The RGoB may decide to: (i) receive the power in-kind and allocate it to vulnerable households or (ii) receive the cash equivalent of revenue that would have resulted from exports of the agreed electricity portion allocated to the RGoB, calculated on a monthly basis. - Tax and regulatory treatment: DHPL subject to same tax and regulatory system as all other hydro projects; incorporated in accordance with the Companies Act of Bhutan and regulated under the same Act. - Fiscal protections and recourse: - Presence of a private non-Bhutanese sponsor reduces fiscal risk; shareholding structure limits fiscal recourse to the government. - Under the signed concession agreement, RGoB will not be providing subsidies or fiscal support; dividends to the RGoB will be transferred annually. - SPV board will not have direct reporting to RGoB or DGPC and will manage its own hiring decisions. ### Transparency, audits, and reporting - Periodic audits: - SPV subject to independent audits by an external private audit firm appointed by the SPV from the panel of auditors maintained by the Royal Audit Authority (RAA). - Audits conducted in accordance with the International Standards of Auditing (ISA), issued by International Auditing and Assurance Standards Board (IAASB). - DHPL will agree the selection of auditors with the lenders. Given presence of an international (Indian) equity investor, periodic verification of audits will be carried out by international auditors. - Financial reporting: - DHPL will prepare Annual Financial Statements following national and internationally accepted accounting principles, separately disclosing the sources of financing. ### Financial conditions, viability, and risk allocation - Cost and funding estimates: - Sponsors’ base total project cost (using a USD-INR exchange rate of 90:1) is US$1.5 billion comprising: a completed cost estimate of US$1.1 billion; contingencies of US$141 million; and interest during construction and financing charge estimates. - US$1.3 billion estimate relates to hard costs only (excluding interest during construction and financing charges) and is based on an earlier exchange rate assumption. - WBG conservatively estimated the financial requirements to be US$1.7 billion for DHPL which will provide a further buffer to sponsors’ estimates. - The project remainder financed via commercial debt: approximately US$1bn. - Leverage and returns: - Project’s leverage ratio: 70 percent (in line with industry standards of 65-70 percent). - Historical ROE for past hydropower projects: about 10 percent. - Estimated ROE for Dorjilung: 16.5 percent. - Cashflow and hydrology assumptions: - Project estimated to yield sufficient cashflow to cover operational and financial flows from the moment of commissioning. - Design energy calculated using more than 30 years of inflow data per Bhutan’s Guidelines for Development of Hydropower Projects (2018). - Hydrological risk considered low; previous plants have generated energy beyond design energy levels in most cases. Upside/downside hydrology accrues to equity sponsors (SPV). - Provision for extension of the concession term if agreed equity return thresholds are not met during the initial concession period to help recover returns. - Lender assumptions and repayment terms: - Lenders assume a longer construction period and lower hydrology than sponsors to assess debt repayment in multiple scenarios. - Lenders will develop a principal repayment profile with at least one year of grace period (after construction) before principal repayment begins for commercial loans. - Currency and revenue denomination: - Both debt service and export revenues will be denominated in INR, mitigating foreign exchange risk. ### Additional mitigating factors and contractual protections - Limited recourse: Project finance structure limits liability of DGPC and RGoB beyond guaranteed debt. - Contractual anchors: - Concession agreement (CA) with RGoB and take-or-pay power purchase agreements (PPAs). - Approximately three quarters of electricity sold to an off-taker in India under an export PPA. - DHPL will conclude a domestic PPA with Bhutan Power Corporation (BPC) for energy generated during winter months; domestic PPA will also cover free power transmitted by BPC under RGoB direction. - Signed concession agreement does not restrict DHPL’s ability to export contractually agreed amounts under the export PPA. - Tariffs set to ensure cost recovery for DHPL lenders and equity sponsors; long-term PPAs expected to generate return on equity and repayment of debt interest and principal. - Risk mitigation measures: - Sponsors experienced with insurance arrangements; international insurance advisor hired to advise on optimal insurance coverage considering mitigation measures for glacial lake outburst floods (GLOF), earthquake and flooding risks. - Lenders will impose and monitor insurance requirements. *Source: Annex I. Assessment of the Exclusion of Dorjilung Non-Guaranteed Debt from the Debt Perimeter (IMF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1btnea2026001-source-pdf.pdf_