Bhutan and the ‘Twin Deficit’ syndrome

The Bhutanese economy has experienced substantial growth in the hydro power sector and other investments over the past two decades, but face challenges on both the fiscal and external fronts due to unfavorable fiscal balance and chronic current account deficit. This begs a question whether Bhutan is in a ‘Twin Deficit’ scenario.

Twin Deficit is defined as a scenario when the economy faces both fiscal and current account deficit. Fiscal deficit means that government revenues are lower than the government’s expenses and that the price of the country’s imports is greater than the income from its exports, often leading to increased borrowing. The current account deficit, on the other hand, occurs when a country imports more goods, services, and capital than it exports. The coexistence of these deficits can be a significant concern, as it may indicate underlying structural weaknesses in an economy.

The president of Gaedu College of Business Studies (GCBS), Dalton Pung shared that Bhutan is presented with a unique case of Twin Deficit, while stronger in many other aspects. He said that Bhutan’s economy is nonetheless not immune to economic challenges.

“The country has experienced fiscal deficits, driven by substantial public sector expenditures, including those on infrastructure and social programs. Additionally, Bhutan’s trade imbalance, with significant imports and limited exports mainly to India, contributes to its current account deficit,” said the president.

The president said that Bhutan’s economic state is currently facing Twin Deficits. He shared that while it poses challenges, there are also opportunities for growth. “Bhutan could focus on diversifying its economy, improving the competitiveness of its exports, and fostering a conducive environment for foreign investment.”

He further added, “Prudent fiscal management and the promotion of sectors with high growth potential, such as tourism and renewable energy could help Bhutan achieve a more sustainable economic trajectory. In essence, a balanced approach that safeguards Bhutan’s unique socio-cultural values while embracing economic reforms could pave the way for a prosperous future.”

On the other hand, despite lately facing challenges such as high commodity prices and a weaker Ngultrum pegged to the Indian currency, the Chief Executive Officer (CEO) of Royal Securities Exchange of Bhutan Limited (RSEBL), Dorji Phuntsho said that Twin Deficits in Bhutan is not a major concern for the country’s economy.

The CEO said that while Twin Deficits may be a significant issue for larger economies like the USA, it is a common occurrence in Bhutan since the 1990s and is likely to continue in the future. He shared that if the government’s expenditure exceeds its revenue, it could lead to borrowing, high taxes, or printing more money, which in turn can result in inflation and crowding out private sector resources.

However, the CEO highlighted that in Bhutan, there is always a cycle of funding through sources like soft loans and grants for the country’s development plans. He said it has become a trend where imports are always above exports and that has been there 10 years ago, and will go on ‘until and unless we develop in terms of capacity competency and become self sufficient, there is no way of balancing export and import.’

He also shared that one way to address the trade deficit is to focus on producing niche products that can be exported or to promote sectors where Bhutan has a competitive advantage over imports.

“To mitigate Twin Deficits, one way is through investments, either to substitute import or promote export. I think bureaucratic and Foreign Direct Investment (FDI) policy should also foresee the international level of investment. Moreover, FDI policies need to be more welcoming to international investors and should support sectors where Bhutanese lack expertise but have competitive advantages,” the CEO said, adding that there is need for more efficient government policies and a conducive environment for FDI to boost trade and investment in the country.

Further, the CEO stresses the importance of addressing structural deficiencies in the economy to mitigate Twin Deficits.

Meanwhile, the fiscal and current account deficits in Bhutan have exhibited a parallel trend, persisting over an extended period. However, these deficits escalated notably in the aftermath of the COVID-19 pandemic. The government’s borrowing from both internal and external sources has been a key contributor to the widening fiscal deficit. Simultaneously, elevated imports, coupled with the depreciation of the Nu, along with global geopolitical tensions and supply chain disruptions, have imposed significant challenges in trade and external imbalances of the domestic economy.

The concept of Twin Deficits emerged in the mid-1980s when the U.S trade balance shifted into deficit concurrently with rising government budget deficit.

Nidup Lhamo from Thimphu