Bhutan’s growth rate to exceed 5% in 2025: WESP Report

Bhutan’s growth rate to exceed 5% in 2025: WESP Report

The economic outlook for Bhutan demonstrates promising resilience and sustained momentum, with the country projected to achieve growth rates exceeding 5 percent in 2025. This optimistic forecast underscores the ability to navigate regional challenges while capitalizing on opportunities in key sectors. The above has been underlined by the United Nation’s (UN) in its “World Economic Situation and Prospects 2025” released on January 9th, 2025.

According to the report, Bhutan’s stable growth trajectory highlights the success of its strategic diversification efforts. The country’s emphasis on expanding tourism has been a cornerstone of its economic policy. Following the disruptions caused by the COVID-19 pandemic, Bhutan has revitalized its tourism sector, leveraging its unique cultural heritage and pristine environment to attract high-value tourists. The government’s commitment to sustainable tourism aligns with its Gross National Happiness (GNH) philosophy, ensuring that economic gains do not compromise environmental and cultural integrity.

The report says that Bhutan’s investments in infrastructure—spanning transportation, energy, and digital connectivity—are laying the groundwork for long-term growth. While hydropower development continues, the nation is also exploring alternative energy sources and industrial sectors to mitigate reliance on hydropower and enhance economic resilience.

On the other hand, the UN has also said that despite Bhutan’s diversification and infrastructure initiatives undertaken to bolster its economic prospects, regional challenges persist. Geopolitical tensions, climate vulnerabilities, and inflationary pressures in the South Asian region could impact trade and investment flows. Bhutan’s landlocked geography adds another layer of complexity, necessitating efficient cross-border cooperation and logistics management.

The report aligns with current economic transformations taking place in the country, especially in terms of economic diversification. Economic experts have told this paper earlier that to sustain and enhance its growth trajectory, Bhutan must continue diversifying its economy while addressing structural challenges. Experts said that other key priorities include: strengthening regional trade by expanding trade partnerships and improving connectivity with neighboring countries to reduce logistical barriers.

There is also the need to enhance human capital by investing in education and skill development to align with emerging sectors such as IT and renewable energy. Bhutan also needs to implement robust environmental policies to safeguard its economy from climate-induced vulnerabilities.

Meanwhile, the UN’s report says the near-term economic outlook for South Asia remains optimistic, with expectations of continued robust growth. The region’s GDP is set to expand by 5.9 percent in 2024, followed by 5.7 percent in 2025 and 6.0 percent in 2026, primarily fueled by strong economic growth in India, along with a recovery in other economies such as Bhutan, Nepal, Pakistan, and Sri Lanka. This growth is a positive sign for the region as a whole, indicating resilience in the face of global challenges.

However, the outlook is not without its uncertainties. The risks are notably skewed to the downside, driven by several factors that could derail the region’s economic progress. Geopolitical tensions could escalate, impacting trade and investment flows. Additionally, there is the potential for a slowdown in external demand, particularly from key global markets, which would affect the export-driven sectors of the region. The ongoing debt challenges in some countries and the risk of social unrest further complicate the landscape. Most concerning of all is the looming threat of extreme weather events. South Asia, with its heavy reliance on agriculture and vulnerable infrastructure, is particularly susceptible to climate hazards, which could pose severe risks to economic stability.

The UN has also said that while the region’s economic outlook remains generally positive, it is essential for South Asian economies to remain vigilant and adaptable. Managing geopolitical risks, addressing social unrest, tackling debt burdens, and fortifying infrastructure against climate change will be crucial to ensuring sustained economic growth and prosperity for the years to come.

The region’s inflationary trends are also noteworthy. Consumer price inflation, which has been a key issue for many South Asian nations, is expected to decline in the coming years. From an estimated 9.9 percent in 2024, inflation is projected to ease to 8.3 percent in 2025 and 7.2 percent in 2026. This decline reflects efforts to stabilize prices through monetary policies, improved supply chains, and a decrease in energy prices.

In 2024, inflation has generally decreased across South Asia, with the exception of Bangladesh, where it continues to be a significant concern due to the economic instability brought on by political unrest. The projections for 2025 indicate a continued downward trajectory in inflation for most countries in the region, with Sri Lanka leading the way at a relatively modest 3.1 percent.

In 2024, most South Asian currencies, including the Indian rupee and the Bangladesh taka, faced depreciation against the United States dollar. Expectations for South Asian currencies in the near term are more favorable, with monetary easing in the United States increasing the region’s attractiveness for both direct and portfolio investments. This shift is expected to ease the downward pressure on local currencies in the coming months.

A significant factor contributing to this outlook is the easing of inflationary pressures across South Asia, which has provided central banks in the region with the flexibility to either pause monetary tightening or continue cutting policy rates. This marks a pivotal shift from previous years when central banks were focused on combating inflation through rate hikes.

Fiscal and external vulnerabilities continue to be a significant challenge for South Asia. Public debt remains elevated across the region, with several countries facing ongoing concerns about debt sustainability. In 2024, average general government debt in South Asia is well above its long-term average, positioning it as the highest among developing regions. Many countries are at risk of debt distress, with the Maldives being one of the most notable examples. The country has experienced a sharp rise in public debt over recent years, and now, with more than $500 million required annually for debt servicing, its external financing needs are substantial. The recent downgrade of the Maldives’ credit rating by Fitch Ratings has raised alarms about the nation’s ability to meet its financial obligations, prompting the government to adopt stringent austerity measures. These measures, including significant spending cuts and tax increases, reflect the growing fiscal strain and the efforts being made to stabilize the economy.

Interest payments on debt have surged, particularly in countries that were already burdened by high debt loads before the pandemic, such as the Maldives, Pakistan, and Sri Lanka. The increase in debt servicing costs has placed significant pressure on government budgets, with regional government interest payments now consuming a higher share of fiscal revenues than the median for developing economies. This situation is driven by a combination of factors, including rising debt levels and sluggish government revenues. These elevated interest payments are not only straining fiscal resources but also limiting the ability of governments to invest in essential public services and development projects.

In the short term, fiscal policies across the region are expected to remain restrictive. Many countries will continue implementing reforms and pursuing fiscal consolidation, often with the backing of IMF-supported programs. While fiscal deficits are projected to narrow over the coming years, they are expected to remain above pre-pandemic levels, reflecting the ongoing challenges of managing public debt. As long as debt levels remain high, the cost of servicing this debt will continue to constrain fiscal space, making it difficult for governments to increase spending on key areas such as infrastructure, social services, and economic recovery. The fiscal challenges facing the region underscore the urgent need for sustainable debt management strategies and reforms that can strengthen fiscal resilience in the face of both domestic and external pressures.

Ugyen Tenzin from Thimphu