Debt-to-GDP

Debt-to-GDP measures the financial leverage of an economy. “The debt can make a country effectively bankrupt. The total debt outstanding at the end of fiscal year ending in June 2011 was estimated at Nu 58.7 billion equivalent representing 80.9% (increase from 66.6% in 2009-10) of GDP of which 47% was rupee debt and 37.9% was foreign debt for convertible currency”…. my concern on country’s debt situation in my blog of 8 April 2012 . The external debt in FY2010-11 was Nu 58.7 billion while its nominal GDP  (total value of goods and services produced at market prices minus imports) recorded  Nu 72.0 billion.

Now it is reported that country’s external debt as of June 2012 has reached  Nu 76.0 billion, an increase of  Nu 17.4 billion (about 30%) from FY2010-11 while GDP for FY 2011-12 is yet to be released.  With such external debt increase, it would not be a surprise to see the debt to nominal GDP ratio going beyond 100% in future.

The nominal GDP for FY 2011-12 would have also increased, taking into account both prices and production increases over the year. If the production of goods and services did not increase during the year, then the entire growth is attributed to an increase in prices alone. So the growth does not reflect any real increase in the production of goods and services.

Of the total rupee debt of Nu 45.0 billion (59% of the total debt), hydropower debt amounts to Nu 32 billion (71% of total rupee debt), and  the short-term liability stands at Nu 13.0 billion (29% of rupee debt)

The short-term liability comprises GOI line of credit: Rs 6 billion; State Bank of India and Punjab National Bank Borrowings: Rs 5.1 billion; and Dungsam Cement debt: Rs 1.8 billion (increased from Rs 1.5 billion in June 2010). 

The convertible currency debt also increased to Nu 30.9 billion (41% of the total debt) from Nu 24.5 billion.

We may take comfort from the fact that the hydropower debt of Nu 32.0 billion (42% of of Nu 76.0 billion) is “self liquidating" with supposedly firm long-term sales contract, and most of the convertible currency debt of Nu 30.9 billion is concessional with easy amortization schedule spread over longer period.

A large portion of the increase in debt is attributed to hydropower loans. The debt increase is likely to continue exponentially for years ahead to complete both ongoing and new hydropower projects (see table below) and to meet other obligations.

Hydropower Projects
Sl.No.	Projects	Capacity MW	Start	Completion	Mode	Work Status
A.  Completed Projects
1.	Chukha Hydropower Plant	336	1979	1988	Bilateral	Completed            (GOI loan liquidated)
2.	Kurichu Hydropower Plant	60	1994	2002	Bilateral	Completed
3.	Tala Hydropower Plant	1,020	1997	2007	Bilateral	Completed
4.	Basochu Hydropower Plant	64	2002	2008	Bilateral (Austria)	Completed
Total		1,480
B.  New Projects
1.	Punatsangchhu-I	1,200	2009	2015	Bilateral	Advance Stage
2.	Mangdechhu	720	2010	2017	Bilateral	Initial Stage
3.	Punatsangchhu-II	990	2010	2019	Bilateral	Initial Stage
4.	Sankosh Reservoir	4,060	2011	2020	Bilateral	Yet to Start
5.	Kuri-Gongri	1,800	2012	2020	Bilateral	Yet to Start
6.	Amochhu Reservoir	620	2012	2018	Bilateral	Yet to Start
7.	Kholongchhu	650	2012	2018	Joint Venture	Yet to Start
8.	Chamkharchhu-I	670	2012	2018	Joint Venture	Yet to Start
9.	Wangchhu	600	2012	2018	Joint Venture	Yet to Start
10.	Bunakha Reservoir	180	2012	2018	Joint Venture	Yet to Start
11.	Nikachhu	208	2012	2017	Druk Green	Yet to Start
12.	Khomachhu	327	2014	2017	Druk Green	Yet to Start
13.	Rotpashong	918	2012	2019	Druk Green	Yet to Start
14.	Gamri	102	2013	2017	Druk Green	Yet to Start
15.	Dagachhu	114	2009	2013	Druk Green	Advance Stage
Total		13,159			Druk Green
Source: Druk Green Power Corporation Limited

Of the 14 new projects (leaving Dagachu aside), 10 projects were identified for the development of 10,000 MW by 2020 under Government of India - Royal Government of Bhutan Framework Agreement. Of which six projects were selected for  bi-lateral funding and remaining four (Kholongchhu, Chamkharchhu-I, Wangchhu Reservoir and Bunakha Reservoir), under joint venture funding by government corporations of Bhutan and India. The remaining four (Nikachhu, Khomachu, Rotpashong and Gamri) are to be developed by Druk Green Corporation out of its own resources.

The Druk Green has estimated that the total investment required for developing 14 projects (excluding Dagachu) as around Nu 190.0 billion.

The World Bank and IMF are of the view that  “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.”  High external debt obviously is believed to have harmful effects on an economy.

Some economists believe that economic growth begins to suffer when a country's debt-to-GDP ratio exceeds 90%.

Also, there is a difference between external debt nominated in domestic currency, and external debt nominated in foreign currency. A nation can service external debt nominated in domestic currency by tax revenues, but all of the money used to service foreign currency debt has to come from a country's balance of payment transfers.

At this point can we afford financial recklessness? Absolutely not !  “The credit works on an economy like steroids on the body of an athlete: you need ever larger injections to maintain the effect”  says Edward Chancellor, global strategist, GMO (investment management firm).