Current account deficit to narrow to 10.6% of GDP in 2022

The average inflation for this year is projected at 7% amid persistent upward pressure on food and non-food pricese projection is as per the Asian Development Bank (ADB)

The current account deficit is projected to narrow to 10.6% of the Gross Domestic Product (GDP) in the current fiscal year, owing to a slight reduction in trade deficit from a projected 16.5% increase in exports and a 14.8% rise in imports.

The deficit, which indicates a shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations, is a contraction in 2020, according to an Asian Development Bank (ADB) report.

The report states that an increase in hydropower exports as a result of new capacity being added and a moderate increase in international tourism receipts are projected to slightly offset the higher import bill resulting from faster growth. However, the deficit is projected at 10.5% of the GDP next year.

In addition, increased capital and financial account inflows exceeded the current account deficit, resulting in an overall balance estimated at $214mn.

The current account deficit is estimated at 11% of the GDP as compared to 13.8% in FY 2020, narrowed due to a decline in the trade deficit, driven by a 30% increase in exports, mainly electricity and minerals.

Bhutan’s gross international reserves increased by $147mn to $1.7bn in 2021, covering for 22.5 months of imports. “Imports grew by 18.0%, reflecting the strong economy and offsetting the 12.6% contraction in 2020.”  

Further, the external public debt of the country increased marginally to $3bn with 118% of the GDP.

External debt is largely concentrated in hydropower, which accounts for 73% of external debt and is mostly denominated in Indian rupees.

“Since hydropower loans are linked with power purchasing agreements, they are not considered high risk. The government has initiated measures to strengthen debt management, including raising transparency and reporting standards,” states the ADB report.

Meanwhile, the average inflation for this year is projected at 7% amid persistent upward pressure on food and non-food prices. A normally functioning supply chain should stave off the price spikes that were a feature of last year’s inflation.

Inflation is expected to remain elevated this year due to the spillover effects of inflationary pressure from India and high global oil and commodities’ prices.

“Inflation is expected to decelerate in 2023 due to easing global oil and commodity prices; the rate is forecast at 5.5%.”

However, the average inflation accelerated to 7.4% last year from 5.6% in 2020. Food inflation averaged 9.9% but declined from high year-on-year inflation at the start of the year at 14.8%. The inflation rate fell to 6.9% in December last year, as the constraints eased. 

The ADB report states that non-food inflation averaged 5.6%, but followed the opposite trajectory to food inflation by starting the year on low year-on-year inflation of 2.0% and rising to 6.8% in December as consumer demand quickened on the economic recovery and rising income.

New wave of COVID-19 outbreaks and the emergence of new variants, rising public debt, and a slower-than-expected recovery in the private sector are the main risks to the outlook over the forecast horizon, according to the report.

Kinley Yonten from Thimphu