Despite significant progress in poverty reduction, the World Bank reports that 19% of Bhutan’s population remains vulnerable to falling back into poverty. This vulnerability is attributed to several key factors, including limited economic diversification, environmental risks from climate change, and macroeconomic challenges.
The World Bank’s Macro Poverty Outlook for Bhutan shows that while Bhutan has made significant progress in reducing poverty, a significant portion of the population is still at risk. Vulnerability to poverty remains high due to factors like low non-farm diversification, dependence on hydropower, and exposure to natural hazards. In particular, nearly half of the population living in poverty is at risk from climate-related events such as landslides.
Factors Contributing to Vulnerability
Hydropower Dependency: The country’s real GDP growth is primarily driven by the hydropower sector, which, while contributing to periods of rapid growth, has limited employment opportunities. The sector employs less than 1% of the labor force, while agriculture, which employs over 40% of the workforce, faces challenges in diversification.
Youth Unemployment: With a youth unemployment rate of 19.2% in 2024, the country faces a growing problem of joblessness, particularly for skilled workers. This has led to an increase in emigration, with 9% of Bhutanese currently living abroad in search of better opportunities.
Environmental and Climate Risks: Natural hazards such as landslides and floods pose ongoing risks to those living in rural areas, where poverty rates can exceed 40%. The vulnerability to climate change remains a significant obstacle to long-term poverty reduction.
Economic Growth and Poverty Reduction
The report shows that economic growth between 2017 and 2022 contributed significantly to poverty reduction. Extreme poverty, defined as living on less than $2.15 per day, was nearly eliminated, and the proportion of people living below $3.65 per day and $6.85 per day also dropped substantially. Despite this progress, the poverty rate remains uneven across the country, with poverty in Thimphu at just 1.5%, while it reaches as high as 41% in Zhemgang. The most significant improvements were observed in rural areas, where non-monetary dimensions of well-being, such as education and sanitation, also improved.
The report also shows that remittances have played a crucial role in supporting household welfare, especially in rural areas. Without remittances, the poverty rate would have been significantly higher, with an estimated 24,000 additional people around 3% of the population classified as poor.
Economic Challenges and Risks
Despite recent progress, several risks to Bhutan’s economic stability and poverty reduction goals persist. The government faces persistent fiscal deficits, mainly driven by low tax revenues and high public spending. The fiscal deficit narrowed in FY23/24 to 0.8% of GDP, but this improvement may be temporary, with the deficit expected to rise again in the short term as the government increases capital spending under the 13th Five-Year Plan (FYP). Public debt, while considered sustainable, remains elevated at 122% of GDP and may restrict fiscal space for social spending.
The current account deficit (CAD) remains a concern, though it has improved from a peak of 34% of GDP to 22.7% in FY23/24. This improvement is primarily due to reduced imports related to crypto currency mining and the recovery of the tourism sector. However, risks such as rising commodity prices due to geopolitical tensions, natural disasters, and climate change-related hazards could further strain Bhutan’s external balances.
The reports also show that the continued emigration of skilled workers is likely to have a negative effect on the economy in the medium term. As Bhutan faces an increasing demand for skilled labor in sectors such as construction, mining, and hydropower, the shortage of domestic workers may hinder economic development.
Economic Performance and Projection
Bhutan’s economy grew by 5.3% in FY23/24, primarily driven by the recovery of the tourism sector and growth in non-hydropower industries like base metals and ferro-silicon. The agriculture sector rebounded to a pre-pandemic growth rate of 3.4%, though industry growth stalled at just 0.2% due to contractions in the hydropower and construction sectors. The services sector grew by a strong 8.7%, led by tourism-related services.
Inflation remained moderate, decelerating from 4.6% to 4.3%, driven by lower food and non-food inflation. The fiscal deficit narrowed due to improved domestic revenue, although public sector wages increased significantly in an effort to reduce high public servant turnover. Capital expenditure remained low in FY23/24, as much of the spending for the 12th FYP was frontloaded during the pandemic recovery period.
Looking ahead, real GDP growth is expected to rise to 7.2% in FY24/25, driven by the commissioning of the Puna-II hydropower plant and growth in non-hydropower industries and tourism. The government’s focus on public sector reforms, private sector development, and infrastructure investment under the 13th FYP should help sustain growth in the medium term.
Poverty reduction is expected to continue, with the proportion of people living below the $6.85/day poverty threshold projected to fall to 5.9% by FY24/25 and 5.0% by FY25/26. However, as mentioned, around 19% of the population remains vulnerable to poverty, particularly due to the ongoing threats posed by climate change, such as landslides, which affect nearly half of the poor.
The World Bank report underscores that, while Bhutan has made considerable progress in reducing poverty, significant challenges remain. The country’s vulnerability to environmental risks, ongoing fiscal deficits, and reliance on a small number of sectors for economic growth mean that poverty reduction will require sustained effort and diversification.
The fiscal deficit is projected to widen to 4.4% of GDP in FY24/25, driven by increased capital spending for the 13th FYP. Public debt will rise further to 122% of GDP by FY25/26. However, most of this debt is linked to hydropower loans, which are considered sustainable in the long term. Rising debt service costs, however, may limit the government’s ability to allocate funds for social programs.
The CAD is expected to continue narrowing in the medium term, reaching 17.5% of GDP in FY24/25 and 9.3% in FY25/26, as imports related to crypto currency mining and hydropower construction decrease. Hydropower exports will rise with the commissioning of the Puna-II plant, and non-hydropower exports (including mining, timber, and tourism) are expected to grow.
Nidup Lhamo from Thimphu
