Bhutan’s economic growth is expected to jump to 7.4% in the fiscal year 2020 with the commissioning of Mangdechhu power plant and the completion of maintenance work in Tala power plant.
Released this week, the World Bank (WB) biannual report titled South Asia Economic Focus is an analysis of the economic situation of South Asian countries.
In the fiscal year 2019, the WB estimated the growth to have rebounded to 5% after a deceleration to 4.6% in fiscal year 2018 due to maintenance and on boarding delays on the two major power plants.
Moreover, the growth in fiscal year 2021 is forecasted just below 6% on the base of strong tourism growth and increased revenue from existing power plants.
Revenue growth is expected due to increased hydro revenue from the Mangdechhu power plant and the introduction of a green tax on fuel and a goods and services tax (GST).
The increase in hydropower exports would narrow the current account deficit further, to 10% and 7% of Gross Domestic Product (GDP) in fiscal year 2020 and 2021, respectively.
The current account deficit was primarily financed through capital inflows from India. Foreign exchange reserves cover nearly 10.1 months of imports.
It would also foresee an expansion of revenue and expenditure that will temporarily widen the fiscal deficit to 4.9% of Gross Domestic Product by fiscal year 2021.
As Bhutan imports approximately 80% from India, and the Bhutanese currency is pegged to the Indian Rupee, the inflation between the countries is closely linked.
Bhutan can expect moderate increase in the near term following a strong growth outlook in India and firm food and fuel prices.
In fiscal year 2019, it saw slowdown in inflation, hitting a low of just above 2% in July 2018 before gradually increasing to 3.1% in April 2019 due to food and oil price dynamics in fiscal year 2019.
The report states the exchange rate has followed the appreciation of the Indian Rupee in recent months, decreasing from Nu 70.78 per US$ to about Nu 69 per US$ in August 2019.
Additionally, tourism is emerging as a secondary driver of growth and, together with electricity exports, has contributed to a narrowing of current account deficit.
Tourist arrivals has increased by 8% in fiscal year 2019, contributing to the growth of service exports.
Despite government debt estimated at 109.3% of GDP, the WB considers it as sustainable due to a special financing arrangement with India, which covers construction risks of hydropower plants and guarantees a return on surplus power purchases.
While, there has been little progress in the labor market as labor force participation fell from 65.7% in 2017 to 62.6% in 2018. Agriculture contributes only 10% to GDP but accounts for 54% of employment.
In addition, poverty reduction will continue at a modest pace in the near term. The US$ 3.20 poverty rate is expected to decline to 9.9% in 2019 and 8.7% in 2020.
However, the WB cautions the economy risks from delays and maintenance outages of planned and existing power plants, which would delay the large expected export and revenue payoffs.To ease these risks, the WB recommends supporting the development of a private sector that can complement growth from hydro, a diversification of public revenue sources towards domestic non-hydro tax bases, and a smoothing of the trajectory of public spending to reduce its responsiveness to revenue increases.
The labor force is young and increasingly educated, presenting a unique opportunity to reap the demographic dividends, if job creation can keep pace.
The report also says that tourism is emerging as a secondary driver of growth and, together with electricity exports, has contributed to a narrowing of the current account deficit.
Thukten Zangpo from Thimphu