Bhutan’s external imbalance is expected to widen sharply in FY2026-27, even as the country’s fiscal position remains relatively favourable, highlighting the growing pressure on the economy from imports, external financing needs and a widening gap with the rest of the world.
According to the Ministry of Finance’s latest Quarterly Macroeconomic Situation and Outlook, 4th Quarter Update, FY2025-26, the current account deficit is projected to widen to 23.4 percent of GDP in FY2026-27, pointing to a significant deterioration in the country’s external position.
At the same time, Bhutan closed FY2025-26 with a relatively contained fiscal deficit and a modest improvement in its public debt-to-GDP ratio, creating a mixed picture of an economy that is showing greater fiscal stability while continuing to face substantial external financing pressures.
The fiscal deficit widened significantly in the fourth quarter of FY2025-26 as government spending surged towards the end of the financial year.
The deficit reached 1.76 percent of GDP in the fourth quarter, up 0.83 percentage points from 0.93 percent in the third quarter.
The increase was driven primarily by expenditure growing faster than revenue mobilisation.
Revenue rose from Nu. 20.629 billion in the third quarter to Nu. 39.501 billion in the fourth quarter, an increase of Nu. 18.872 billion. Government expenditure, however, climbed from Nu. 23.762 billion to Nu. 45.471 billion, an increase of Nu. 21.709 billion.
The Ministry attributed the higher quarterly deficit largely to the concentration of government expenditure towards the end of the financial year.
Despite the sharp fourth-quarter deterioration, the overall fiscal position remained favourable.
The full-year fiscal deficit is estimated at just 0.38 percent of GDP, lower than the projection in the previous quarterly update.
The Ministry attributed the improved annual position mainly to stronger revenue mobilisation and lower expenditure utilisation than previously anticipated.
Bhutan’s public debt position also improved during the quarter.
Total public debt stood at 105.2 percent of GDP as of June 2026, down from 107.7 percent in the third quarter, a decline of 2.5 percentage points.
The reduction was primarily attributed to loans related to the Punatsangchhu-II hydropower project.
The decline in hydropower-related debt was partly offset by a marginal increase in non-hydropower debt, mainly reflecting budgetary borrowing from the International Development Association (IDA).
Although the debt-to-GDP ratio has improved, Bhutan’s public debt remains high relative to the size of its economy.
Central government debt also declined marginally, with the Ministry attributing the reduction to lower notional financing requirements associated with the reduced fiscal deficit.
The central government debt-to-GDP ratio fell by 0.2 percentage points during the quarter.
The projected 23.4 percent current account deficit stands out against the relatively favourable fiscal numbers.
A current account deficit of this magnitude means Bhutan will need substantial external financing to cover the gap between its earnings from exports and other external income and its payments to the rest of the world.
For a small, import-dependent economy, the external position remains closely tied to imports of goods, investment-related expenditure, hydropower and other large projects, tourism receipts and foreign-exchange earnings.
The projected widening of the current account deficit therefore presents a different challenge from the fiscal deficit.
While the government’s domestic fiscal position can be assessed through its revenue, expenditure and borrowing, the current account reflects the economy’s broader relationship with the outside world.
The fourth-quarter fiscal figures also underline the need for more balanced expenditure management.
The government collected considerably more revenue in the final quarter, but expenditure rose even faster. This resulted in the sharp increase in the quarterly deficit.
The pattern suggests that maintaining a low annual fiscal deficit will not, by itself, eliminate pressures associated with the timing and efficiency of public expenditure.
Continued monitoring of expenditure, revenue mobilisation and financing requirements will therefore remain important as the government enters the new financial year.
The latest figures present a mixed economic picture: Bhutan has strengthened its annual fiscal position and reduced its public debt-to-GDP ratio, but its external financing requirement is expected to increase significantly.
Sherab Dorji, Thimphu
