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At A Glance

A small, landlocked country nestled deep in the Himalayas between India and China, Bhutan is characterized by steep mountains and deep valleys, which led to scattered population settlement patterns. Since Bhutan shifted to a democratic constitutional monarchy in 2008, the country has embarked on a development strategy founded on the principle of Gross National Happiness.

The country is known for its unique philosophy – Gross National Happiness (GNH) – which guides its development strategy. Abundant water resources in the valleys create ideal conditions to tap renewal energy sources with hydropower development which has spurred economic growth with quasi universal access to low-cost electricity. Fiscal revenues from selling surplus hydropower to India and tourism have helped the country invest substantially in human capital development. This has led to significant improvements in service delivery, education and health outcomes. Bhutan has made tremendous progress in reducing extreme poverty and promoting gender equality, with continuing efforts to address social inequality issues and regional disparities.

The economy has been significantly affected by the series of external shocks of the COVID-19 pandemic and the global ramifications of Russia’s invasion of Ukraine. Pandemic-related relief measures and weak public revenue performance have resulted in high fiscal deficits and public debt. Financial sector vulnerabilities remain substantial due to high non-performing loans. The state holding company—Druk Holding and Investments —invested in crypto-mining operations to accelerate digital transformation towards diversifying the economy, which resulted in a significant decline of international reserves and a widening of the current account deficit (CAD) due to imports of information technology (IT) equipment.

Election related spending and the materialization of financial sector contingent liabilities could further erode buffers in FY23/24 (July 2023 to June 2024), given that about 60 percent of assets of the financial sector are controlled by the public sector. Additional delays in the commissioning of hydro projects could further constrain the country’s ability to narrow fiscal and external balances.

Country Context

Bhutan is a lower-middle income country. Rapid economic growth in Bhutan has contributed to substantial poverty reduction over the last two decades. Annual real GDP growth averaged 7.5 percent since the 1980s, driven by the public sector-led hydropower sector and strong performance in services, including tourism. The ongoing poverty and equity assessment shows that extreme poverty based on $2.15/day was eliminated by 2022, and the population living below the $6.85/day poverty line for upper middle-income countries decreased from 39.5 percent to 8.5 percent between 2017 and 2022. The reduction in poverty can be attributed to the growth in labor and agriculture productivity and income, as well as remittances, which led to an increase in real per capita consumption, especially in rural areas. The Gini index, which measures income inequality, decreased from 37 in 2017 to 28 in 2022. Despite this progress, vulnerability to poverty and spatial inequality remains a significant challenge.

Bhutan maintains strong economic and strategic relations with India, particularly as its major trading partner, source of foreign aid and as a financier and buyer of surplus hydropower. While hydropower has provided a reliable source of growth, non-hydro sectors, facing constraints related to the country’s challenging investment climate including high trade costs and a small domestic market, remain less competitive. As a result, job creation outside of the public sector and agriculture has been limited. The lack of economic diversification and limited private sector activity pose risks to long-term growth and job creation. High unemployment rates since the COVID-19 pandemic, particularly among the youth, contributed to significant emigration. The youth unemployment rate, which was already high before the pandemic, stood at 29 percent in 2022.

Recent Economic Developments

The economy has grown by 4.6 percent in FY22/23, supported by the reopening of borders for tourism in September 2022. The industry sector grew by 5.1 percent, reflecting a strengthening of construction and manufacturing activities, but the electricity sector contracted. The services sector grew by 5.0 percent, supported by transport- and trade-related services, resulting in more employment opportunities in the sector, including an increase in hotel and restaurant jobs. Tourist arrivals remained below pre-COVID-19 levels because of weaker consumer confidence globally and the new tourism levy act, which tripled the sustainable development fee (SDF) for international tourists. However, the SDF was halved starting in September 2023 to attract more high-end tourists.

Average inflation moderated from 5.9 percent in FY21/22 to 4.6 percent in FY22/23, driven by a slowdown in imported food inflation. N However, non-food inflation remained elevated at 5.9 percent, in line with price movements in India (70 percent of Bhutan’s imports come from India, and the BTN is pegged to the INR). The food security situation has returned to pre-COVID levels in 2022, especially for the urban poor, which can be attributed to the deceleration in food prices.

The fiscal deficit narrowed from 7.7 percent of GDP in FY21/22 to 5.1 percent in FY22/23 due to higher domestic revenue and lower capital spending. Total revenue increased due to higher non-hydro revenue, reflecting the gradual recovery in the industry and services sectors. Total expenditures declined because of lower capital spending in the last year of the Twelfth Five Year Plan (FYP).

The CAD has remained elevated at 27.8 percent in FY22/23, due to imports of IT equipment and a slow recovery of tourism. Exports increased, reflecting higher tourism receipts (albeit from a low base given near-zero tourism receipts in FY21/22). Goods imports are expected to remain high, reflecting the import of crypto mining equipment and elevated commodity prices. As a result, gross international reserves are expected to decline further from US$833 million in June 2022 to US$533 million in June 2023, equivalent to 4.3 months of FY22/23 imports.

Economic Outlook

The real GDP growth rate is projected to decline to 4 percent in FY23/24. Overall growth is expected to be supported by higher growth in tourism-related services. On the demand side, growth is supported by private and public consumption, reflecting higher government spending. However, public investment is contributing negatively to growth due to a decline in capital spending. Medium-term growth is expected to be supported by a recovery in the non-hydro industry and services sectors, and by the commissioning of a new hydro plant.

Inflation is expected to remain elevated in the short-term owing to higher import prices, before moderating in the medium term. The incidence of poverty is estimated to decrease slightly to 0.4 percent and 7.9 percent in 2023, based on $3.65/day and $6.85/day, respectively. However, about 7 percent of the population will still be vulnerable to poverty.

The fiscal deficit is expected to increase to 6.1 percent of GDP in FY23/24 due to an increase in current spending following a major salary hike to address significant staff attritions. An increase in tax revenue will be offset by lower hydro profit transfers and external grants. Capital expenditures are projected to decline as the 12th FYP ended in June 2023, and capital spending is typically lower in the first two years of a new FYP. The fiscal deficit is expected to decline beyond FY24/25, reflecting a moderation in primary recurrent expenditure and increased hydro revenue.

Despite a decline in hydro debt, public debt is projected to remain elevated as a share of GDP in the medium term due to high fiscal deficits. Risks to debt sustainability are expected to remain moderate as the bulk of the debt is linked to hydro project loans from India with low refinancing and exchange rate risks.

The CAD is projected to decline to 17 percent of GDP in FY23/24 due to a large reduction in IT equipment imports, and to moderate further in the medium term, supported by an increase in tourism and electricity exports. International reserves are expected to increase to 6.2 months of import coverage in FY23/24.

Last Updated: Oct 03, 2023


Bhutan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments
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Royal Textile Academy Building (Level 2)
Chubachu, Thimphu-11001, Bhutan