𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐝𝐢𝐯𝐞𝐫𝐬𝐢𝐟𝐢𝐜𝐚𝐭𝐢𝐨𝐧 𝐚 𝐦𝐮𝐬𝐭 𝐟𝐨𝐫 𝐬𝐮𝐬𝐭𝐚𝐢𝐧𝐞𝐝 𝐠𝐫𝐨𝐰𝐭𝐡: 𝐀𝐃𝐁

𝑨𝒔𝒊𝒂𝒏 𝑫𝒆𝒗𝒆𝒍𝒐𝒑𝒎𝒆𝒏𝒕 𝑩𝒂𝒏𝒌 𝒔𝒕𝒓𝒆𝒔𝒔𝒆𝒔 𝒕𝒉𝒂𝒕 𝒅𝒆𝒑𝒆𝒏𝒅𝒆𝒏𝒄𝒆 𝒐𝒏 𝒉𝒚𝒅𝒓𝒐𝒑𝒐𝒘𝒆𝒓 𝒂𝒏𝒅 𝒎𝒂𝒓𝒌𝒆𝒕 𝒅𝒐𝒎𝒊𝒏𝒂𝒏𝒄𝒆 𝒐𝒇 𝑺𝑶𝑬𝒔 𝒄𝒐𝒖𝒍𝒅 𝒄𝒓𝒊𝒑𝒑𝒍𝒆 𝒆𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝒅𝒊𝒗𝒆𝒓𝒔𝒊𝒇𝒊𝒄𝒂𝒕𝒊𝒐𝒏

Unless Bhutan addresses structural constraints and emerging challenges, including heavy dependence on hydropower and over-crowding of state-owned enterprises (SOEs), achieving its ambitious development goal of raising the GDP to Nu 10 Billion (B) by 2034 will be difficult, according to the Asian Development Bank (ADB).

𝑾𝒉𝒚 𝒊𝒔 𝑩𝒉𝒖𝒕𝒂𝒏 𝒍𝒂𝒈𝒈𝒊𝒏𝒈 𝒃𝒆𝒉𝒊𝒏𝒅?

The bank specifically points out some major setbacks in the economic structure of the country like the decline in long-term economic growth, slow post-pandemic recovery, worsening fiscal performance, growing debt levels, narrow economic base and dominance of hydropower, dominance of SOEs, lack of an enabling environment for private sector growth, high youth unemployment and migration, mismatch between labor supply and demand, shifting health needs, gender equality and social inclusion, rise in economic inequality, and regional disparities.

Bhutan’s economic performance has weakened in recent years, with the annual average growth rate declining to 6% from 2010 to 2019. This slowdown is attributed to several factors, including a downturn in manufacturing, insufficient reforms to reduce regulatory burdens on the private sector, growing dominance of SOEs, and the completion of only one major hydropower project, the 720MW Mangdechhu plant in late 2019. Although GDP per capita tripled from USD 723 in 2000 to USD 2,194 in 2010, it only grew by 1.7 times to USD 3,688 by 2019.

The strong GDP growth of 8% from 2000 to 2009 was driven by the commissioning of two hydropower plants—the 60MW Kurichhu plant in 2002 and the 1,020MW Tala plant in 2007—along with significant manufacturing growth in power-intensive, mineral-based industries such as ferrosilicon, cement, and ceramics. Economic reforms and an open economy further supported this growth. During this period, hydropower, manufacturing, construction, financial services, and real estate contributed approximately 60% of the growth.

The covid-19 pandemic severely impacted Bhutan’s economy, which had already been slowing over the previous decade. The government effectively managed the spread of the virus through lockdowns, strict travel restrictions, and high vaccine coverage (around 95%), resulting in only 21 covid-19 deaths. However, prolonged restrictions, border closures with India, and a ban on tourism caused the economy to contract by 10.2% in 2020. Fiscal and monetary measures mitigated some adverse effects on small businesses and vulnerable sectors but worsened Bhutan’s fiscal position and increased debt levels.

In 2018 and 2019, Bhutan’s fiscal deficit was relatively low, at 2.4% and 1.1% of GDP, respectively. However, the pandemic-induced economic slowdown sharply reduced tax and non-tax revenue, while increased government spending on covid-19 relief and economic stimulus raised the fiscal deficit to 6.7% of GDP by 2023.

The tax-to-GDP ratio fell from 15.7% in 2018 to 12.2% in 2020, before rising to 13.3% in 2023. Reforms like the property tax act of Bhutan 2022, which introduced a uniform value-based property tax rate, significantly boosted revenue. The government expects around USD 7 million (M) in annual revenue from revised property taxes. Transitioning to a goods and services tax (expected in July 2025) could mobilize additional taxes equivalent to about 1.1% of GDP.

Bhutan’s heavy reliance on imports for essential goods, coupled with low value-added exports and poor terms of trade, has led to a large current account deficit. This deficit averaged 19.8% of GDP from 2016 to 2019 but worsened to 31.2% of GDP in 2022. Gross international reserves, mainly in Indian rupees and US dollars, fell from USD 1,214M in 2019 to USD 607M in 2023. This decline is due to weak tourism recovery, the depreciation of the ngultrum, and significant imports of bitcoin mining equipment. Import coverage dropped from 14.7 months in 2019 to 5.5 months in 2023.

Hydropower exports to India decreased from USD 303M in 2021 to USD 17M in 2023 due to reduced hydrological flows and increased domestic power consumption from bitcoin mining.

The public debt-to-GDP ratio rose from 94% in FY 2019 to 136.8% in FY 2023. External debt constitutes 120.6% of GDP, with 88.2% of total public debt being external. Approximately 69% of Bhutan’s external debt is related to hydropower projects, primarily funded by the government of India. This debt is self-liquidating, as it is repaid through power sales to India and carries no exchange rate risk. The IMF assessed Bhutan’s public debt distress risk as moderate in May 2022. Domestic debt increased from 4.2% of GDP in FY 2019 to 16.2% in FY 2023, largely consisting of government bonds and treasury bills.

Bhutan’s economy relies heavily on hydropower projects, both during construction and operation. From 2011 to 2020, earnings from hydropower exports to India represented an average of 10% of GDP, 33% of government revenue, and 35% of export earnings.

However, the sector, which is capital-intensive, employs only about 1% of the workforce. Bhutan’s hydropower capacity increased from 1,660MW in 2015 to 2,326MW in 2019, and is expected to reach 3,473MW by 2025 with new projects like the Nikachhu (118MW) and Punatsangchhu II (1,020MW) plants. ADB highlighted that expanding capacity should support economic diversification into sectors such as light manufacturing, food processing, and creative industries.

Bhutan operates 35 SOEs across various sectors including agriculture, energy, manufacturing, and banking. Concerns exist about SOEs crowding out private businesses due to government subsidies and preferential treatment. In 2021, SOEs generated revenues of USD 729.5M, with the five best-performing SOEs earning a profit of USD 140.8M and the five worst-performing posting a loss of USD 24M. SOEs accounted for 11,000 jobs (3.5% of national employment) and had assets equivalent to 207% of GDP. Given Bhutan’s small economy and fiscal stress, the performance and rationale of some SOEs should be reassessed.
Economic diversification in Bhutan is hampered by its location, small market size, and inadequate policy and regulatory environment. Despite reforms to promote foreign direct investment (FDI) and public-private partnerships (PPPs), results have been limited. FDI (excluding hydropower) fell from 0.13% of GDP in 2019 to 0.04% in 2020–2022. Barriers to investment include complex approval processes, equity restrictions, and visa difficulties. The high non-performing loan rates in banks and competition with SOEs further restrict private sector growth. Reforms in technical and vocational education and training (TVET) are underway, but more is needed to create job opportunities aligned with youth aspirations.
Youth unemployment in Bhutan reached 28.6% in 2022 due to the economic slowdown and the return of overseas workers during the pandemic. Although travel restrictions have eased and many workers have resumed overseas assignments, youth unemployment remains high at 22.9% in early 2024. Emigration of youth and professionals has increased, with around 64,000 Bhutanese living abroad, representing 9% of the population. This brain drain poses challenges for Bhutan’s development.

Despite high youth unemployment, there is a mismatch between available jobs and the skills of the workforce. In 2023, Bhutan issued permits for 137,324 foreign workers, predominantly for construction jobs. Local employers often prefer foreign workers due to perceived higher skills and lower wages. Efforts to reform and expand the TVET system are underway, but further steps are needed to reduce business costs, support the private sector, and create job opportunities aligned with youth aspirations.

Bhutan’s health system faces challenges, including disparities in access between urban and rural areas. While the country has a strong health service structure, urban hospitals are overcrowded, and rural facilities are underutilized. Non-communicable diseases now account for about 69% of deaths. The outmigration of health professionals affects service delivery. Improving health infrastructure and addressing these disparities remain critical.

Bhutan ranks 103rd out of 146 countries in the global gender gap report. Gender inequalities persist, particularly in employment and decision-making. Women’s unemployment rate (7.9%) exceeds that of men (4.4%), and their labor force participation rate is significantly lower. Gender-based violence is prevalent, with 44.6% of women and girls reporting experiences of violence. Women’s participation in technical and scientific fields remains low.

Improving gender equality and social inclusion requires addressing these disparities and strengthening support mechanisms for vulnerable groups.

While Bhutan has made progress in poverty reduction, income inequality has increased, with the Gini coefficient rising from 0.55 in 2007 to 0.60 in 2022. Rural poverty is significantly higher than urban poverty, and access to essential services remains limited in rural areas. Infrastructure investment should focus on underserved areas to ensure equitable growth.

Bhutan has 20 dzongkhags, with significant population concentrations in Thimphu, Chhukha, and Samtse. Poverty is concentrated in the southern and eastern dzongkhags. Migration from rural areas to cities for employment opportunities is rising. ADB recommends that investment in infrastructure in underserved dzongkhags is essential to promote balanced growth.

Challenges and opportunities to sustainability and resilience. Bhutan’s geologically fragile and steep topography make it highly susceptible to geophysical risks. Climate change, rising global temperatures, and irregular precipitation patterns increase the frequency and intensity of extreme weather events, with impacts that include flooding, glacial lake outburst floods, landslides, and forest fires. Current trends are projected to persist, posing increasing threats to communities, agricultural land, infrastructure, and Bhutan’s biodiversity. The hydropower sector, which is critical for Bhutan’s economy, can be adversely affected by climate change in the years ahead. ADB’s shift toward climate change and disaster risk management under its new operating model presents an opportunity to provide greater support to the Government of Bhutan’s climate commitments and programs, and ensure alignment with government’s priorities by providing TA and knowledge solutions for climate adaptation, investment planning, and conducting multi-hazard risk assessments to inform ADB operations.

By Tashi Namgyal, Thimphu