Bhutan’s external sectors face deficit crisis

The external sector of the country is grappling with the formidable challenge of a trade deficit, sparking concerns about the Nation’s ability to meet the Constitutional reserve requirements as the deficit is projected to widen even further to Nu 29 billion (B) in FY 2023–24. The overall trade deficit record in Fiscal Year FY 2022–2023 stood at Nu 28.8B, according to provisional data.

The country’s gross international reserve, a critical buffer against external shocks, stood at USD 573.6 million (M) at the end of the fiscal year, enough to finance 14.8 months of essential imports. However, as the deficit deepens, the reserves are expected to dwindle rapidly, potentially posing significant risks to Bhutan’s economic stability.

The reserves are expected to dwindle to USD 216.4M in FY 2023-2024, enough to cover only 6 months of essential imports. This projection reserve falls below the constitutional requirement of covering essential imports for 12.5 months, setting off alarm bells for the country’s economic stability.

Meanwhile, the current account balance (CAB) shows signs of improvement, decreasing from a deficit of Nu 77,919M in FY 2022–23 to a projected Nu 58,135M in FY 2023–24. This shift is driven by higher budgetary grant inflows, boosted service and hydropower exports, remittances, and interest earnings. The CAB is estimated to improve further in the coming years.

A significant part of the CAB’s improvement can be attributed to the merchandise trade. The trade deficit has decreased from Nu 84,397M in 2022 to a projected Nu 70,573M in 2023. This improvement is largely due to reduced imports from countries other than India, including commodities such as machinery, vehicles, mineral products, and pharmaceutical products.

On the part of capital and financial accounts, it paints a mixed picture. In FY 2023–24, the accounts (excluding net errors and omissions) are estimated to decrease to Nu 29,087M from Nu 34,092M in the previous fiscal year. This decline is primarily driven by a significant reduction in the capital account, which saw a 37% decrease, equivalent to Nu 3,403M.

However, the future might hold some promise. The capital account is expected to improve with grant disbursements in the 13th Five-Year Plan and the construction of new hydropower projects. Similarly, the financial account is estimated to experience a short-term decline of Nu 1,601M in FY 2023–24 but may see a resurgence soon due to higher investment inflow estimates and ongoing pipeline loans, both hydro and non-hydro.

Although the road ahead for the country’s external sector is fraught with challenges, financial experts suggests there are opportunities for recovery.

“The country’s reliance on hydropower projects and international grants could prove pivotal in stabilizing its economy. However, prudent management of reserves and strategic diversification of trade partnerships will be crucial to ensure sustainable growth,” an official from the Royal Monetary Authority (RMA) said.

She added, “While the external sector’s deficits may pose challenges, the path forward lies in harnessing the strengths of the Bhutanese economy and fostering international collaboration for a brighter future. The nation must leverage its existing strengths while adapting to new challenges in order to achieve a stable and prosperous future”.

By Nidup Lhamo, Thimphu