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. The WBG has also started preparations for the Systematic Country Diagnostics (SCD) as a basis for the formulation of its next County Partnership Framework (CPF) in alignment with the 12th FYP of the Royal Government of Bhutan. Under IDA18 (FY2018-20), Bhutan is eligible to receive approximately $100 million in IDA financing.
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). The country successfully completed its third parliamentary elections and the new government has endorsed 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. The economy has grown at an annual average rate of 7.5 percent over the past decade, registering the 16th highest growth rate among 135 countries for which comparable data are available.
Bhutan maintains a solid macroeconomic performance. Macroeconomic stability has accompanied the improved growth performance. GDP growth in 2018/19 is expected to decelerate slightly to 5.4 percent compared with 5.8 percent in the previous year. Inflation slowed to about 3 percent in the first half of 2018/19, mainly due to stable non-food prices. The ngultrum depreciated slightly against the US dollar. It is fully pegged to the Indian rupee and trade with India accounts for more than 80 percent of Bhutan’s international trade. As the inflation rates between the countries are strongly correlated, the real effective exchange rate remained stable.
In the financial sector, gross non-performing loans at 12.4 percent of total loans warrants continued attention, despite high capital adequacy and sufficient provisioning. With continued export growth, the current account deficit is likely to narrow to 17.2 percent of GDP in 2018/19. As of November 2018, gross international reserves stood at $1 billion, equivalent to 11 months of imports of goods and services. In the first half of 2018/19, capital spending fell, as no new capital projects were implemented due to the elections. In addition, higher revenues from royalties and corporate income taxes are expected to contribute to a narrowing of the fiscal deficit to 0.7 percent of GDP in 2018/19. Public debt as a share of GDP is broadly unchanged at about 107.5 percent in 2018/19.
Economic growth may average 5-6 percent per annum over the medium term, supported by the services sector and higher net exports. In the services sector, the key drivers are likely to be hotels and restaurants, retail trade and transportation, underpinned by tourism. The fiscal deficit is projected to be around 3 percent of GDP over the medium term. Revenue growth will be supported by royalties from Mangdechhu, corporate income taxes, and the introduction of GST in 2020/21.
Spending is also likely to increase over the medium term as the government undertakes new public investment programs in line with the Twelfth Five Year Plan. Current expenditures are projected to increase with higher spending on the maintenance of hydropower plants and a possible increase in public sector wages. In spite of the continuing fiscal deficit, public debt as a share of GDP is projected to decline. This is because large amortization payments associated with hydropower investments begin with operationalization of the plants and are the main determinants of the debt trajectory.
The transition out of agricultural jobs will continue to be slow, due to challenges in accelerating private sector development. The tourism sector has expanded significantly in recent years, with the number of visitor arrivals increasing by 21.5 percent between 2016 and 2017 alone. Utilizing the growth potential of the tourism sector could help accelerate poverty reduction as tourism-related jobs tend to have low entry barriers and require low skills. Improving internal connectivity and further investing in tourism promotion and development could help create jobs and increase earnings in the sector.
Last Updated: Apr 12, 2019