The Kingdom of Bhutan is a small, mountainous, landlocked country in South Asia, located in the eastern Himalayas, bordered by India and China. Bhutan is home to a population of about 770,000 spread over approximately 38,394 square kilometers, with about 71 percent of its land under forest cover.
Bhutan politics has changed significantly in recent years. In 2008, the country undertook a transition from an absolute monarchy into a constitutional monarchy with an elected parliament. The first elections for the National Council were held on December 31, 2007, while elections for the National Assembly were held on March 24, 2008 and the second Parliament elections were held in 2013.
The government focuses on hydropower, agriculture, tourism, cottage and small industries, and mining as key growth drivers and job creation. A combination of prudent fiscal and monetary policy, as well as robust investments in hydropower contributed to the acceleration of growth from 2.1 percent in 2013 to 6.5 percent in 2015. Inflation was 3.2 percent in 2016 and the exchange rate against the US dollar was mostly stable. The current account deficit increased to 30 percent of GDP in 2015 reflecting large investments related to hydropower projects financed mainly by loans from India. Despite the higher current account deficits, adequate financing meant gross international reserves remained stable, covering 11.3 months of goods and services imports as of October 2016. The fiscal deficit was 1.3 percent of GDP in FY2015/16, and is expected to increase to about 2.5 percent in FY2016/17. The deficit largely reflects an increase in capital expenditures for infrastructure development such as roads. The 2016 WB-IMF joint Debt Sustainability Analysis (DSA) concluded that the risk of debt distress was moderate, which is unchanged from the 2014 DSA.
In the absence of a vibrant private sector, public-sector jobs are highly coveted among the educated youth, leading to an increasing urban youth unemployment (21 percent in 2010, 23 percent in 2013 and 28 percent in 2015).
The overall macroeconomic outlook is positive but pressures on domestic demand related to hydropower development will have to be managed. The impact of the ongoing turbulence in global financial and exchange markets is expected to remain moderate on Bhutan’s economy, mostly through higher imported inflation and lesser tourism earning in the event of a global economic slowdown. While debt risk is assessed as moderate, the rapid build-up over the recent year cautions against any additional non-concessional borrowing, given that Bhutan’s debt-carrying capacity will only improve in the long run reflecting significantly higher electricity exports when hydropower projects come on stream. Efforts to deepen the financial sector must be sustained to provide the country the basis for financing sound and sustainable development and diversification. Despite remarkable progress in poverty reduction, large urban/rural gaps remain. Queuing for public-sector jobs and high reservation wages among urban youth and widespread informality in rural areas point to significant mismatches in the labor market.