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FEATURE STORY

2010 Bhutan Economic Update

May 11, 2010

Promoting Development

May 11, 2010 - Although Bhutan saw a decline in annual tourism revenues and a loss of over $67 million due to Earthquake and Cyclone damages, economic growth exceeded 6% in 2008-09. The government is taking important steps to reconstruct and promote private sector development.

Economic Indicators in Bhutan

The rate of economic growth in Bhutan exceeded 6% in 2008-09, however, this is below the 11-14% for the two previous years. The past year saw a decline of $7 million in annual tourism revenues from 2008 levels, and an estimated loss of $67 million due to earthquake and cyclone damage. Bhutan looks to recover from these setbacks in the near future.

Bhutan’s debt is projected to increase significantly to 4.5%, but the risk of debt distress in the medium term is ‘moderate’, since the debt build-up is due largely to hydropower development loans that can be serviced with future revenues.

Ambitious plans for hydropower development are expected to yield dividends in growth and revenue in the coming years. In addition, the authorities are taking important steps to promote private sector development by improving the policy environment and liberalizing the financial sector.

Hydropower Opportunities

Hydropower is a major engine of growth and public revenue, and the government has ambitious plans for the sector. The kingdom has the potential to develop a capacity of 23,760 MW, of which only 5% has been tapped so far. Under the current year plan, the installed hydropower generation capacity is projected to rise from 1,488 MW in 2007 to 1,602 MW in 2013, with the planned commissioning of the 114 MW Dagachu hydropower project.

In addition, the government proposes to add 10,000 MW of capacity by 2020. To this end, Bhutan and India have agreed to develop 10 hydropower projects together.

Construction work on Punatsangchhu I hydropower project is under way, and construction on Punatsangchhu II and Mangdechhu hydropower projects are due to commence shortly.

Outlook

After some easing of inflation from high levels in late-2008, there are signs that food inflation is resurging. Food inflation increased by 4.1% from the second quarter.

Bhutan‘s credit accessibility in the Doing Business Report 2010 placed it 177th out of 183 countries. Expenditures are about one-third higher than 2008-09 revised estimates, due largely to increased civil servant salaries, and higher development spending, balanced partly by a projected increase in grants (particularly those from India).

The Bhutanese economy was largely isolated from the global economic crisis. Although the World Bank projects somewhat slower growth in 2010 than the 2009 fiscal year, ambitious hydropower development plans are expected to yield future dividends in growth and revenue.


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