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    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. The country is famous for its unique philosophy – Gross National Happiness (GNH) – which guides its development. Abundant water resources create ideal conditions for hydropower development which has spurred economic growth. Fiscal revenues from hydropower have helped finance large investments in human capital which led to significant improvements in service delivery and educational and health outcomes. Access to electricity is almost universal while access to functional piped water was 95 percent in 2015.

    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 almost completed the Systematic Country Diagnostics (SCD) as a basis for the formulation of its next County Partnership Framework (CPF) in alignment with the 12th Five-Year Plan (FYP) of the Royal Government of Bhutan. 


    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 GNH. The country successfully completed its third parliamentary elections in 2018 and the new government has endorsed the 12th 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 become a lower-middle income country and poverty has been cut by two-thirds in the last decade. Average annual growth of Gross Domestic Product (GDP) has been 7.5 percent since the early 1980s, making Bhutan one of the fastest growing economies in the world. Gross National Income (GNI) per capita, at $3,080 in 2018, is now three times the threshold for lower middle-income countries and only 10 percent below the threshold for upper-middle income countries. Poverty measured using the $3.20 poverty line (in 2011 PPP terms) has declined from 36 percent in 2007 to 12 percent in 2017. There was good progress in shared prosperity, though the pace of progress slowed down in recent years.


    Bhutan’s economy continues to be dominated by hydropower and its economic relationship with India. Growth is estimated to have rebounded to 5 percent in FY2019 after a deceleration to 4.6 percent in FY2018 due to maintenance and on-boarding delays on two major power plants (Tala and Mangdechhu). On the demand side, growth was underpinned by exports and consumption, reflecting the progress in hydropower maintenance and a procyclical public demand response to the associated income inflows. Services remain the main driver of growth on the supply side, where wholesale and retail trade has emerged as the key contributing sub-sector.

    Approximately 80 percent of Bhutan’s imports are from India, and the Bhutanese Ngultrum is pegged to the Indian Rupee. Thus, inflation between the countries is closely linked. FY2019 began with a slowdown in inflation, hitting a low of just above 2 percent in July 2018 before gradually increasing to 3.1 percent in April 2019 due to food and oil price dynamics. The exchange rate has followed the appreciation of the Indian Rupee in recent months, decreasing from 70.78 BTN per USD to about 69 BTN per USD in August 2019.

    Developments in the hydropower sector also contributed to a narrowing of the current account deficit to 16.3 percent of GDP in FY2019, as exports from the Tala plant expanded after the conclusion of maintenance work. At the same time, tourist arrivals increased by 8 percent in FY2019, contributing to the growth of service exports. The current account deficit was primarily financed through capital inflows from India. Foreign exchange reserves cover nearly 10.1 months of imports.

    Bhutan has maintained its course of sustainable public finances, with the fiscal deficit estimated to have reduced to 2.1 percent of GDP in FY2019, from 4.6 percent two years prior. This reflects revenue growth from reforms that increased the corporate income tax base and changed the valuation rules for sales tax on vehicles in FY2018, and a slowdown in the initiation of new capital projects which limited spending growth. Government debt is estimated at 109.3 percent of GDP and is considered sustainable due to a special financing arrangement with India, which covers construction risks of hydropower plants and guarantees a return on surplus power purchases.

    Little progress was observed in the labor market as labor force participation fell from 65.7 percent in 2017 to 62.6 percent in 2018. Agriculture contributes only 10 percent to GDP but accounts for 54 percent of employment. Working in agriculture is highly correlated with being poor: about 66 percent of poor household heads work in agriculture. Increases in agricultural exports and productivity helped reduce poverty in recent years. Extreme poverty at USD 1.90 per day is almost eliminated, a laudable achievement. The USD 3.20 poverty rate (in 2011 PPP) is estimated to have declined from 12 percent in 2017 to 11.2 percent in 2018. Hydropower is capital intensive and contributes little to job creation. Overall unemployment is low, but high youth unemployment represents Bhutan’s challenge to create more and better jobs.


    Growth is expected to edge up to 7.4 percent in FY2020 on the back of increased hydropower exports from the newly on-boarded Mangdechhu plant. In the medium term, growth is expected to stabilize between 5 and 6 percent, supported by the initiation of new public investment projects under the 12th Five Year Plan and the construction of the Punatsangchhu I and II hydro plants.

    Inflation is expected to increase moderately in the near term, following a strong growth outlook in India and firming food and fuel prices. Increased hydropower exports are expected to narrow the current account deficit further, to 10 and 7 percent of GDP in FY2020 and FY2021, respectively.

    The fiscal outlook for Bhutan foresees a joint expansion of revenue and expenditure that will temporarily widen the fiscal deficit to 4.9 percent of GDP by FY2021. Revenue growth is expected due to increased hydro revenue from the Mangdechhu power plant and the introduction of a green tax on fuel and a goods and services tax (GST). Expenditure growth in the short-term is expected to outpace revenue growth due to increased investments in non-hydro projects as part of the 12th Five-Year-Plan and public sector wage increases.

    Poverty reduction will continue at a modest pace in the near term. The USD 3.20 poverty rate is expected to decline to 9.9 percent in 2019 and 8.7 percent in 2020. Diversification into non-hydropower sectors remains the key challenge to accelerating job creation in non-farm sectors. Maximizing the growth potential of the tourism sector could significantly contribute to jobs and income growth, especially among the rural poor and low-skilled. As poverty is almost exclusively rural, efforts to develop agribusinesses and increase agricultural productivity will need to continue, by investing in the downstream value chain.

    Last Updated: Oct 17, 2019

  • The World Bank Group and Bhutan

    Bhutan became a member of The World Bank in 1981, International Finance Corporation (IFC) in 2003, and Multilateral Investment Guarantee Agency (MIGA) in 2014.  WBG support is guided by the CPS. The overarching goal of the CPS is to support Bhutan’s aspirations to achieve sustainable and inclusive growth. The CPS is aligned with the Royal Government’s 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 PLR 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 almost completed the SCD as a basis for the formulation of its next 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 $106 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 is already in discussions with the Government to ensure alignment with the government priorities and programs under 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 and participated in the joint Bhutan Nepal HCP Forum in June 2019.

    World Bank Program

    As of October 2019, IDA lending portfolio consists of a Development Policy Credit (DPC, $30 million). To complement the project with IDA credits, the World Bank also provides support through more than 12 grants / trust-funded activities including Bhutan Reducing Emissions from Deforestation and Forest Degradation (REDD+) readiness project ($8.6 million); Global Agriculture Food Security Program ($8 million);  Hydromet Services and Disaster Resilience Regional Project ($3.8 million); Youth Employment and Rural Entrepreneurship Project ($1.25 million) and the Preparation of Strategic Program of Climate Resilience ($1.5 million). These activities are underpinned by Advisory Services and Analytics. The World Bank, for example, has conducted Forestry Note, Urban Policy Notes, 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.

    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.


    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: Oct 17, 2019

  • Under the current CPS, outcomes have been moderately satisfactory and notable advances have been made in the three results areas.

    Improving fiscal and spending efficiency

    The WBG under this results area made good progress in supporting government reforms to increase revenues, lower deficit and stronger public financial management and procurement systems. The WBG deepened its engagement in this area through a series of DPCs and ASA activities to promote policy measures that enabled government to improve revenue and expenditure performance. The country’s fiscal discipline is expected to be further strengthened through the introduction of GST and the work on fiscal rules as part of the next DPC series.  The 2016 Pubic Expenditure and Financial Accountability (PEFA) assessments confirmed that Bhutan has good fiscal discipline through comprehensive coverage of budget execution, good control of expenditure commitments and oversight aggregate fiscal risk and the quality and timeliness of budget reports. The government with the support from the Bank’s technical assistance developed a PFM Reform Strategy and Action Plan and the Multi Donor Fund (PFM-MDF) has been supporting to implement key reform activities.

    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. The CPS program made progress in improving efficiency of and access to financial services and streamlining institutional process for improved business environment. The programmatic DPC series and ASA supported various reforms and systems enhancement to simplify business procedures. However, these progresses have not yet been fully translated into private sector development.  

    Supporting Green Development

    The WBG supported to promote improved irrigation and agroeconomic practices and rehabilitation of productive assets for key commodities. Despite implementation challenges the program helped to increase agriculture productivity in key commodity such as paddy. The access to urban infrastructure improved in addition to increased revenue generation for Thimphu municipality. IFC’s first PPP concession for Thimphu City parking facilities is a significant milestone for Bhutan’s further engagement with the private sector. The Bank’s strong partnership through various grant mechanisms enabled government to mainstream biodiversity conservation into national planning which is highly relevant to improving the management of natural capital and resilience to the impacts of climate change. 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. A forestry note was also jointly prepared with the Royal Government of Bhutan.

    Last Updated: Oct 17, 2019



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

*Amounts include IBRD and IDA commitments


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Tenzin Lhaden
Acting Country Representative
Bhutan Development Bank Limited Bldg.
Norzam Lam Chubachu
P.O. Box 244
Thimphu, Bhutan