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.  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.  

    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). 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 OUTLOOK

    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

  • The World Bank Group and Bhutan

    Bhutan became a member of The World Bank in 1981, International Finance Corporation 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 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. Priority areas include economic diversification, job creation, decentralization, urbanization, and education. The WBG has also started preparations of Systematic Country Diagnostics (SCD) as a basis for the formulation of its next County Partnership Framework (CPF) in alignment to the 12th FYP of the Royal Government of Bhutan.

    Bhutan is eligible for concessional financing support from the International Development Association (IDA). Under IDA17 (FY2015-17), Bhutan had a total allocation of $56 million in IDA financing. Under IDA18 (FY2018-20), Bhutan is eligible to receive approximately $100 million in IDA financing with more favorable terms. To support Bhutan’s development with the increased availability of IDA financing with better terms, the World Bank has started strategic discussions with the Government to ensure alignment with the government preparations of the 12th FYP. Bhutan is one of about 30 early adopters of the Human Capital Project (HCP), a global effort to accelerate more and better investments in people for greater equity and economic growth.

    World Bank Program

    As of April 2019, IDA lending portfolio consists of Bhutan Urban Development Project (BUDP) ($29 million). To complement the projects with IDA credits, the World Bank also provides support through more than 11 grants / trust-funded activities including Bhutan Reducing Emissions from Deforestation and Forest Degradation (REDD) readiness project ($8.6 million); Sustainable Financing for Biodiversity Conservation and Natural Resources Management ($4 million); Global Agriculture Food Security Program ($8 million);  Hydromet Services and Disaster Resilience Regional Project ($3.8 million)Bhutan BLSS Economic Census ($0.7 million); and the Preparation of Strategic Program of Climate Resilience ($1.5 million). These activities are underpinned by ASAs. The World Bank, for example, has conducted an In-Depth Labor Study, Managing Environmental and Social Impacts of Hydropower in Bhutan, Investment Climate Assessment, Agribusiness Policy Note, Bhutan Development Update and Practical solutions for addressing labor-related barriers to Bhutan’s private employment growth. Additionally, as part of World Bank’s engagement with a wider group of stakeholders, National Council of Bhutan, the upper house, and the World Bank organized a three-day workshop on “Understanding the Fundamentals of Macroeconomics and the National Budget” in May 2018.

    World Bank-IFC Collaboration

    The IFC has a total committed investment portfolio in Bhutan of about $25 million. The portfolio consists predominantly of IFC’s investments in the financial sector, a hazelnut plantation project and support for the expansion of a local hotel.  The advisory portfolio includes advice in structuring PPPs, improving Bhutan’s investment climate and enhancing access to financial services.

    IFC continues to explore areas of assistance in financial, tourism, manufacturing and agribusiness, sectors among others. IFC’s advisory support on investment climate reforms, infrastructure development through PPPs and the financial sector 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 includes policy and regulatory actions to promote private sector employment opportunities.  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: Apr 02, 2019

  • 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 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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LENDING

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

*Amounts include IBRD and IDA commitments


PHOTO GALLERY

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Additional Resources

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