Overview

  • AT A GLANCE

    Bhutan maintains solid growth and macroeconomic stability. Hydropower construction and supportive fiscal and monetary policy have contributed to solid growth. Single-digit inflation, a stable exchange rate, and accumulating international reserves attest to the stability. Nevertheless, structural challenges remain, including large current account deficits, high public debt, an underdeveloped private sector, and a high youth unemployment rate. A delay in hydropower construction could cloud macroeconomic prospects in the coming years.

    Bhutan has a stable political and economic environment.  It has made a tremendous progress in reducing extreme poverty and promoting gender equality, while attention is needed to address inequality issues.

    World Bank Group (WBG) support is guided by the Country Partnership Strategy (CPS) FY2015-2019 and the 2017 Performance and Learning Review (PLR). It focuses on improving fiscal and spending efficiency, increasing private-sector growth and competitiveness and supporting green development.  Under IDA18 (FY2018-20), Bhutan is eligible to receive approximately $100 million in IDA financing.  

    COUNTRY CONTEXT

    Bhutan’s political environment has been stable and economic conditions have improved in recent years. Since Bhutan shifted to a democratic constitutional monarchy in 2008, the country has developed a solid development management system founded on the principle of Gross National Happiness (GNH). Bhutan plans to hold its third parliamentary election in 2018.  The Gross National Happiness Commission (GNHC) is leading the preparation of the 12th Five-Year Plan (FYP) for 2018-2023. Bhutan maintains strong economic and strategic relationships with India, particularly as the major trading partner, as a source of foreign aid and as a financier and buyer of hydropower. Bhutan is vulnerable to natural disasters and climate-related risks.

    Bhutan has been successful in reducing poverty. Extreme poverty has been almost eradicated, with the rate falling to 2 percent in 2012 using the international poverty line of $1.90 per person a day.

    RECENT ECONOMIC DEVELOPMENTS

    Bhutan is one of the smallest but fastest-growing economies in the world. Annual average growth between 2006 and 2015 reached 7.5 percent, which places the country 13th of 118 countries, far exceeding the average global growth of 4.4 percent.

    Bhutan maintains a solid macroeconomic performance.   Macroeconomic stability has accompanied the improved growth performance. GDP growth is estimated at 6.6 percent in 2016/17 driven by hydropower construction.  Government consumption and gross fixed capital formation led to solid growth on the demand side. However, in 2017, bad weather led to an increase in food prices. The Consumer Price Index (CPI) increased from 3.9 percent in November 2016 to 5.3 percent in August 2017. The Bhutanese ngultrum, pegged to the Indian rupee, has been stable since the second half of 2016. The current account deficit remained high at 23 percent of GDP in 2016/2017 due to capital goods imports for hydropower projects. The deficits were almost fully financed by loans from India. Therefore, as of May 2017, gross international reserves exceeded $1 billion, equivalent to 10 months of imports of goods and services. The fiscal policy has become expansionary to support the last year of the implementation of the 11th FYP. The fiscal balance is projected to improve but still show a deficit of 2.5 percent in 2017/18, from 4 percent in 2016/17.

    ECONOMIC OUTLOOK

    Hydropower construction will support solid growth, but a delay of one or two years in completing two hydropower projects has prompted the World Bank to revise down its growth projections for 2017–2019 by a few percentage points. Agriculture and tourism are expected to grow steadily.

    Implementation of the 2016 Economic Development Policy and accompanying 2017 Fiscal Incentives Bill are expected to stimulate economic activity. Once food prices become stable, CPI is expected to be stable at around 3 to 5 percent. Although current account deficits will remain high, they are expected to be below 10 percent in 2019/20 due to the operationalization of the Mangdechhu hydropower project. According to the Government’s medium-term expenditure framework, fiscal deficits are projected at around 3 to 4 percent of GDP. Due to the delays in hydropower construction, financing sources of fiscal deficits remain unidentified. Projections based on GDP growth indicate steady and continuous poverty reduction. 

    Last Updated: Oct 12, 2017

  • The World Bank Group and Bhutan

    Bhutan became a member of the World Bank in 1981, IFC in 2003, and MIGA in 2014.  WBG support is guided by the CPS (FY2015-19). The overarching goal of the CPS is to support Bhutan’s aspirations to achieve sustainable and inclusive growth. The CPS is aligned with the 11th FYP and WBG activities are organized under three results areas: improving fiscal and spending efficiency; increasing private-sector growth and competitiveness; and supporting green development. 

    The Performance and Learning Review was completed in June 2017. It assesses the first two years of implementation of CPS and updates the focus of WBG’s support program.   The WBG is making progress toward achieving the expected CPS outcomes, although implementation of some investment projects has been delayed, primarily due to insufficient government capacity and problems with procurement. The WBG program is expected to expand and intensify across the three CPS results areas.  Discussions are underway with the government to build a pipeline of activities in conjunction with the preparation of the 12th FYP starting in mid-2018. Priority areas include economic diversification, job creation, decentralization, urbanization, and education. A Systematic Country Diagnostic will be carried out in FY2018-19 to assess Bhutan’s development constraints and priorities.

    Bhutan is eligible for concessional financing support from the International Development Association (IDA).  Under IDA17 (FY2015-17), Bhutan had a total allocation of US$56 million in IDA financing. Under IDA18 (FY2018-20), Bhutan is eligible to receive approximately $100 million in IDA financing.

    World Bank Program

    Bhutan’s portfolio comprises five projects, totaling $74.5 million.  It includes three IDA projects: development policy credits to strengthen fiscal management and the financial sector, an urban development project and a rural community development project.  It also receives trust fund financing for biodiversity conservation and for food security and agricultural productivity.

    In 2016, Thimphu municipality became the first entity in the world to be eligible to use its own procurement systems for World Bank-financed projects, under the Alternative Procurement Arrangements (APA) of the Procurement Policy.   Under IDA18 (FY2018-20), Bhutan is eligible to receive approximately $100 million in IDA financing.  The World Bank is expected to use these increased resources to support the government’s priorities such as strengthening fiscal management, developing the hydropower sector and infrastructure, expanding employment opportunities and addressing labor market challenges including through education and health. 

    The World Bank has provided a range of analytical support and technical assistance. To contribute to the government’s reform agenda and policy dialogue, the World Bank has prepared policy notes on the impact of hydropower development and agribusiness as a source of economic growth. It has made recommendations to improve investment competitiveness, and on the potential for green growth.  It has also carried out the first review of the labor market, which established the cause of underlying problems and provided data for the government’s social protection and labor strategies. The World Bank also carried out the 2016 Public Expenditure and Financial Accountability (PEFA) assessment that provided the basis for a comprehensive Public Financial Management reform program and action plan to be supported through a PFM Multi-Donor Fund (PFM MDF).  It provided technical support for the design of a new program to help the poor and improve the statistical capacity to monitor and measure poverty and welfare conditions. 

    World Bank-IFC Collaboration

    The International Finance Corporation (IFC) has a committed investment portfolio of US$21 million as of June 30, 2017.  It consists of an equity participation in Bhutan National Bank (BNB), a loan to help finance the refurbishment and expansion of a world-class tourist hotel, Zhiwa Ling, and an equity investment to support a hazelnut plantation, nursery, and processing operation. IFC has made five investments in Bhutan since it became an IFC member in 2003.  IFC continues to explore assistance in the areas of financial inclusion, tourism, agribusiness, and manufacturing. IFC’s advisory support on investment climate reforms, enhancing financial inclusion and SME development is expected to continue.

    IFC and the World Bank work together to strengthen Bhutan’s financial market and investment climate. The second in a series of development credits prepared jointly by the World Bank and the IFC includes policy and regulatory actions to increase efficiency and access to financial services.  The two institutions also coordinated closely in developing a public-private partnership policy, a tourism policy note and an agribusiness strengthening note for the Government.

    The World Bank helped Bhutan create a Financial Sector Development Action Plan, centered on enhancing financial inclusion. IFC hosted two major events to promote understanding of the subject among stakeholders. It is advising commercial banks and the central bank on implementing best practices which will further encourage financial inclusion.

    MIGA

    On October 21, 2014, Bhutan became the 181st member of the Multilateral Investment Guarantee Agency (MIGA).  MIGA has yet to guarantee a project in the country, but the Agency remains engaged and is ready to support productive projects, across sectors, in Bhutan.  

    Last Updated: Oct 12, 2017

  • Under the current CPS, outcomes have been satisfactory and notable advances have been made in the three results areas.

    Improving fiscal and spending efficiency

    With WBG support, the government has introduced measures to improve revenue and expenditure performance through a fiscal consolidation and prudent debt policy approved in August 2016 and supported by DPC series. Tax collection has improved through a Tax Public Notification that raises custom duties, sales taxes and green taxes on selected items. The Royal Monetary Authority (RMA) introduced a new policy on reserve management in 2015, which allows the RMA to convert hard currency reserves into Indian Rupees. The CPS program is also on track to achieve the targets related to PFM and procurement. The 2016 PEFA Assessment Report shows improvements in PFM over the 2010 assessment including budget credibility, oversight of aggregate fiscal risk and the quality and timeliness of budget reports. The first phase of the electronic Government Procurement (e-GP) system is in an advanced stage of development.

    Increasing Private sector growth and competitiveness

    The private sector in Bhutan is in its early stages of development. Its potential to engage in sectors that are currently dominated by the state is yet to be realized with an appropriate regulatory and policy environment. The government, with the support of the WBG, has taken important steps in formulating policy reforms to simplify business procedures and spur private investment. With the support of the World Bank’s DPC series, a Financial Sector Development Action Plan (FSDAP) was approved in 2016 to address gaps and vulnerabilities in the financial system in a cost effective way. IFC is also providing financial infrastructure advisory services to increase access to finance to Micro Small and Medium Enterprises.

    Supporting Green Development

    The WBG has been supporting the agricultural sector through irrigation schemes to improve crop production, community-led infrastructure activities and advisory services. Progress is moderate in improving irrigation facilities in the poorest and most remote parts of the country. There have been improvements in developing infrastructure in northern Thimphu, with construction completed in two Local Area Plans and work continuing on a third. The CPS target to expand areas under protected area management was achieved. ASAs are underway that are looking into the causes of deforestation and forest degradation, as well as prospects for improved forest management and natural capital accounting. The World Bank is also supporting implementation of a new mineral development policy by carrying out a technical assessment of gaps and outdated content in the current policy in an attempt to promote good international practices. The World Bank has developed a comprehensive and long-term program to support the government in strengthening disaster and climate resilience.

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Contacts

Yoichiro Ishihara
Resident Representative & Sr. Country Economist
Bhutan Development Bank Limited Bldg.
Norzam Lam Chubachu
Mailing Address
P.O. Box 244
Thimphu, Bhutan
+975-77-182-111
yishihara@worldbank.org