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.
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.
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 15, 2018