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ESCAP Photo/Anant Jha

Bhutan is one of two countries globally that maintains a carbon-neutral status and is the only country in the Asia-Pacific region that can claim this title. However, as the country recovers from the aftereffects of the COVID-19 pandemic, it faces mounting pressure to accelerate economic growth, alongside the additional burden of financing the Sustainable Development Goals and its climate objectives. Additionally, with Bhutan poised to graduate from its least developed country (LDC) status in December 2023, this entails new challenges and opportunities.

Bhutan’s debt-to-GDP ratio has reached 134.8 per cent, which is primarily dominated by external borrowing (122 per cent). However, a big chunk of this external debt comes from loans for hydro projects (hydro debt at 82.5 per cent of GDP, 67.7 per cent of total external debt). A significant portion of this debt is from India and is self-liquidating given that the export revenue is expected to adequately cover the debt servicing cost, as indicated by past loans, along with the Government of India’s guarantee to buy energy surplus at cost plus margin. Additionally, the debt is denominated in INR to which the national currency Ngultrum is pegged, which reduces currency risk. Due to this unique position, the International Monetary Fund’s Debt Sustainability Analyses have consistently judged Bhutan’s debt-carrying capacity as “medium”.

Cognizant of the challenges that lie ahead, Bhutan is setting the stage for a paradigm shift in sustainable finance mobilization in the country. The financial system has a vital role to play in supporting the transition towards financing climate adaptation and mitigation initiatives. Notably, thematic bonds such as green, social and sustainability bonds are one option that governments have utilized to mobilize capital towards their climate goals. The issuance of such instruments has been steadily growing over the past decade.

Issuances in the Asia-Pacific region have been so far dominated by corporates issuing green bonds, but sovereigns are increasingly looking at thematic bonds to fund earmarked projects with green, climate, social or cross-cutting goals (sustainable).

The issuance of Sustainability Bonds in Bhutan could support the country in accelerating its effort to achieve its climate adaptation and mitigation priorities, provide new investment options and support green job creation. The sovereign thematic bond issuance will also have the potential to crowd in private sector investment, channelling finance towards national adaptation and mitigation priorities.  

ESCAP has engaged with the Government of Bhutan since 2017, where ESCAP provided technical assistance to the issuance of Bhutan’s first-ever sovereign bond. Building on the momentum, ESCAP is working with the government to develop its Sustainability Bond Framework. The Framework will serve as a crucial document guiding the government's future issuance of a Sustainability Bond. In the recent stakeholder workshop on financing Bhutan’s green transition, co-hosted by the Government of Bhutan and ESCAP, key Ministries came together to deliberate on the development of the sovereign Sustainability Bond Framework. Adhering to international best practices the four major components, 1) use of proceeds; 2) project evaluation and selection; 3) management of proceeds and 4) reporting, were discussed and outlined to complement the particularities of the national context.

Special emphasis was given to the use of proceeds as a crucial step not only for the projects that could be funded from the bond’s issuance but could also potentially serve as the foundation to build a steady pipeline of investable projects through other innovative modes of financing for mitigation and particularly adaptation which is critical for a climate vulnerable carbon-negative country.

Bhutan’s uniqueness was also reflected while deliberating on project categories under the framework. For instance, while some international guidelines recommend eligible green hydro projects to be less than 25 MW, due to concerns of potential displacement and biodiversity loss, Bhutan with its comprehensive protection of forests and population distribution away from probable sites with hydro potential, could present a strong case of larger-scale green hydroelectricity projects, with its holistic approach and verifiable safeguards.

Similarly, “Clean Transportation” (in a country where the geography renders trains irrelevant) was another section which was discussed to be adapted to reflect Bhutan’s unique context and sustainable development priorities. Acknowledging and incorporating the vagaries of the Bhutanese context the development of the Sustainability Bond Framework is moving forward with a collaborative approach.

At the same time, Bhutan is also developing its green taxonomy with the support of the Asian Development Bank. While this is not a mandatory requirement to issue thematic bonds it will certainly enable better classification of projects and further curtail greenwashing. Both the framework and the taxonomy are instrumental steps in Bhutan’s journey towards unlocking potential alternative sources of sustainable finance. The Sustainability Bond Framework would help align the issuance with national priorities, ensure adherence to best practices like project selection and reporting, and facilitate coordination among key ministries while ensuring transparency for the investors.

These massive strides will help Bhutan diversify its creditor base, enable access to innovative financing options and help the country move closer to unlocking its potential to achieve the climate and sustainable development ambitions.

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Deanna Morris
Economic Affairs Officer, Macroeconomic Policy and Financing for Development, ESCAP
Anant Jha
Climate Finance Consultant, Macroeconomic Policy and Financing for Development, ESCAP
Macroeconomic Policy and Financing for Development +66 2 288-1234 [email protected]