As Bhutan embarks on its 13th Five Year Plan (2024–2029), which aims to build a robust financial system to mobilize resources for national development, the Asian Development Bank (ADB) has called for deeper structural reforms in the country’s financial sector to sustain growth momentum.
In its first quarterly economic outlook for 2025, the ADB forecasts Bhutan’s economy to grow by 8.5% this year. However, it cautions that this ambitious growth can only be sustained if the country undertakes financial deepening—a comprehensive process aimed at expanding and improving the financial sector’s efficiency, liquidity, and capacity to support long-term investments.
The ADB emphasizes that Bhutan’s limited financial depth results in higher risk premiums and borrowing costs, while simultaneously restricting access to more productive, high-return investments. This situation, the report argues, undermines countercyclical fiscal policies, with increased government borrowing potentially crowding out private investment.
Conversely, a more developed financial sector, the report notes, would stabilize markets, offer more affordable financing options, and promote fiscal consolidation by balancing public and private sector investment.
Between 2016 and 2024, Bhutan’s net claims on the private sector averaged only 60% of GDP—well below levels observed in comparable economies such as Nepal—highlighting the stagnation in private sector credit growth. Since the COVID-19 pandemic, private credit has shown high volatility, and recent trends indicate a deceleration.
Bhutanese banks continue to rely heavily on fixed asset-backed lending due to their limited ability to conduct thorough cash flow-based appraisals. Most of the credit is concentrated in the tourism and housing sectors, with housing alone accounting for 30% of total credit. This poses a risk of credit concentration and limits resources for other productive sectors.
While non-performing loans declined to 7.4% of outstanding credit in 2024—down from 14.6% in 2020—the ADB warns that this improvement may be temporary, as pandemic-era loan repayment deferments are still in effect. The end of these financial relief measures may expose hidden vulnerabilities in the financial system.
ADB’s Economics Officer in Bhutan, Sonam Lhendup, noted that the country’s monetary policy remained accommodative throughout 2024. The Royal Monetary Authority (RMA) maintained the cash reserve ratio at 8.0%, its main liquidity control tool. A halt in the withdrawal of hydropower project-related balances in mid-2023 also helped boost liquidity. Moreover, the minimum lending rate was reduced from 6.8% in June 2024 to 6.4% in December 2024.
He stressed the need to move beyond non-market tools like the cash reserve ratio, advocating instead for mechanisms aligned with actual cash or project flows to enhance monetary policy effectiveness.
Bhutan’s current account remained narrow in 2024 but is projected to widen in 2025. On a positive note, net foreign assets increased by 7.4% in 2024, a sharp recovery from the 18.3% contraction seen in 2023. This growth was supported by higher remittances, official grants, and proceeds from bitcoin sales.
However, private sector credit growth slowed sharply to 2.7% in 2024, down from 15.0% the previous year. This was largely due to a decline in education loans, as key destination countries tightened visa regulations and imposed restrictions on international student enrollments.
The overall money supply expanded by 8.0% in 2024, fueled by an increase in domestic deposits. A key driver was the disbursement of the first tranche of Bhutan’s $180.7 million Economic Stimulus Plan, launched in 2024 with financial support from the Government of India.
As Bhutan aims to meet the ambitious goals of its 13th Five Year Plan, the ADB’s findings highlight the urgent need for targeted reforms to deepen the financial sector, strengthen monetary policy tools, and diversify credit to support a sustainable and inclusive growth path.
Sangay Rabten from Thimphu
