This study empirically investigated the debt sustainability of Bhutan by adopting Geometry of Debt Sustainability. The study is carried out by separating the total external debt into hydropower-related debt and non-hydropower debt. The results revealed that the hydropower debt which accounts for 77% of total external debt is found unsustainable while, the non-hydropower debt appears sustainable based on this analysis. The high level of current account deficit (21% of GDP) accompanied by the non-concessional interest rate on hydropower loans are the main factors contributing to the nonsustainability of hydropower debt. The study further estimated the governments' reaction towards an increasing level of government debt through estimation of fiscal reaction function for the period 1985-2017. Unit root and cointegration techniques, and Vector Error Correction Model (VECM) are used to determine the behaviour of the government. The findings showed that the government is taking corrective measures to the increasing debt to ensure fiscal sustainability.This study empirically investigated the debt sustainability of Bhutan by adopting Geometry of Debt Sustainability. The study is carried out by separating the total external debt into hydropower-related debt and non-hydropower debt. The results revealed that the hydropower debt which accounts for 77% of total external debt is found unsustainable while, the non-hydropower debt appears sustainable based on this analysis. The high level of current account deficit (21% of GDP) accompanied by the non-concessional interest rate on hydropower loans are the main factors contributing to the nonsustainability of hydropower debt. The study further estimated the governments' reaction towards an increasing level of government debt through estimation of fiscal reaction function for the period 1985-2017. Unit root and cointegration techniques, and Vector Error Correction Model (VECM) are used to determine the behaviour of the government. The findings showed that the government is taking corrective measures to the increasing debt to ensure fiscal sustainability.