Key messages:
Economic Update
The Royal Government of Bhutan has successfully contained two domestic outbreaks in August and December 2020 with strict nationwide lockdowns. Borders have remained closed since March 2020. Tourism and related services were severely affected in the second half of fiscal year (FY) 2019/20 (January to June 2020) when borders were closed. Industrial outputs were significantly affected by supply-chain disruptions. Following a strong growth of 4.3 percent in FY2018/19, the economy contracted by 0.8 percent in FY2019/20.
The hydropower sector performed well, thanks to the on-streaming of the Mangdechhu hydropower plant in August 2019. Hydropower exports doubled, as a share of GDP, from FY2018/19 to FY2019/20, offsetting the decline in non-hydro power exports.
Food inflation averaged 15.6 percent in the first half of FY2020/21. High food prices, along with disruptions in agricultural activities, likely eroded the real incomes of many rural poor. This is expected to have led to a slight increase in poverty in 2020. The labor market shock from COVID-19 mainly affected service sector workers in urban areas, including many that directly or indirectly depend on tourism. However, the Druk Gyalpo Relief Kidu (DGRK) program—which provides immediate income support to vulnerable households—helped reduce adverse welfare impacts.
Outlook
Since the tourism sector is not expected to resume at least until mid-2021 or later, service sector output is expected to fall by 3.7 percent in FY2020/21. Labor shortages, high input prices, and trade disruptions will continue to affect construction, manufacturing, and non-hydro power exporting industries. As a result, the economy is projected to contract further, by 1.8 percent in FY2020/21.
Output is expected to return to pre-pandemic levels in FY2021/22 when tourist inflows and non-hydro industry activities gradually resume. Growth is expected to pick up in FY2022/23, as tourism recovers and the Punatsangchhu (Puna) II hydropower project begins operations.
However, the pace of economic recovery will depend on how fast COVID-19 vaccines can be deployed globally, specifically in India, given the significant tourism and trade linkages between the two countries. Risks to the outlook are high given continued pandemic-related uncertainties.
Digital Economy for a Resilient Recovery
The digital economy, including e- trade, is likely to emerge as a major growth pillar in the aftermath of the COVID-19 crisis. The government has prioritized information and communications technology (ICT) development to promote the vision of ‘an ICT-enabled, knowledge society as a foundation for Gross National Happiness.’ Initiatives, such as the Digital DrukYul flagship program, aim to increase Bhutan’s digitalization and participation in e-commerce.
Yet, constraints in the e-trade environment, such as limited Internet connectivity, high costs of payment transactions, an incomplete regulatory infrastructure, and high trade facilitation and logistics costs persists.
The report suggests that to develop the country’s e-trade framework, the country must ensure the following:
