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FEATURE STORY

Bhutan Economic Update Fall 2011

November 16, 2011

ECONOMY'S GROWING QUICKLY BUT THERE ARE SIGNS OF OVERHEATING

November 2011 - Real GDP grew at 8.1 percent between July 2010-June 2011 (Fiscal Year 2011) up from 5.7 percent in FY08, continuing the upward trend in growth.

Growth Prsopects

According to the latest Bhutan Economic Update for 2011, growth was strong in FY11, reaching 8.1 percent. The construction of hydropower projects mainly drove growth along with a rebound of the tourism sector from a downturn in causedby the global economic crisis. The country is expected to grow at 8-9 percent per year over the next three years with the construction sector excpected to grow at 20-25 percent.

Inflation Remains a Concern

As of end June 2011, inflation rose to reach 8.3 percent, in line with price developments in India. Food prices rose by 10.6 percent while non-food prices rose by 7.1 percent.

Account Deficit

The fiscal deficit widened significantly in last year reach 4.8 percent of GDP, compared to a surplus of about 1.7 percent a year earlier. This was mainly because of a rise in spending on infrastructure developmentcoupled with sluggish growth in revenues.

Spending has increased over the last two years due to increased imports for hydropower projects, and is estimated to be around 7.9 percent of GDP. However, grant and loan payment offset these large current account deficits, resulting in a positive overall balance of payments and a comfortable currency reserves.

The current account deficit is projected to deteriorate overthe next few years because of rising imports for the hydropower sector and declining external grants. Short term projections are for an average deficit of 14 percent of GDP between 2010 and 2013. The overall balance of payments, however, will continue to show a surplus over the period due to robust capital inflows.

Bhutan’s public debt stock, currently at 66 percent of GDP, is projected to increase to over 70 percent by 2013 due to finance of hydropower development. Risks to sustainability are mitigated by the commercial viability of these projects which are expected to make a retrun and Bhutan’s good track record of project implementation.

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