Economy expected to grow by 5% in the medium term of 2023

The growth in the economy is driven by the recovery in services, manufacturing, and hydro-power, according to the finance ministry

The economy of the country is expected to grow at an average of 5% in the medium-term, this year. The growth will be mainly driven by the recovery in services, manufacturing, and hydro-power, according to the macroeconomic outlook of the ministry of finance (MoF), which was released recently.

It states that under three drivers, “hydro-power generation capacity is expected to double, supporting growth, the current account balance, and the fiscal position.” Similarly, the fiscal deficit is expected to moderate as pandemic-related measures are gradually phased out and revenue reforms deepen.

Meanwhile, the current account deficit and reserve coverage are expected to improve from declining hydro power-related imports and rising hydro-power exports.    

However, the ministry has stated that there are downside risks to the medium-term outlook with the fore-casted recession in the global economy growth forecast, increasing food and energy prices, and the modest upturn in tourism.

Nonetheless, economic growth of 4.9% is anticipated in 2022 despite the two prolonged lock-downs from mid-January to March to contain the spread of the virus.

The MoF’s report notes that the nation’s achievement of mass vaccination, together with 90% of its adult total population having received a booster dose by early March 2022, backed by robust policy measures and gradual opening up of tourism by September 2022, will lead to the economy sustaining a growth of 4.9%.

“The growth trajectory was based on the assumption that there will be no emergence of new variants or mobility restrictions while government spending continues to boost aggregate demand and investments are implemented on time,” the report states.

Amidst heightened global and regional uncertainties coupled with emerging issues within the domestic economy, downside risk to growth is anticipated. In addition, the consequences of rising geopolitical conflict and increasing food and energy prices will adversely impact the economy posing risks to growth prospects.

In the medium term, the recovery in services and hydro-power is expected to drive growth, with electricity generation capacity expected to double, provided the commissioning of various hydro-power projects takes place on targeted time.

According to the Asian Development Bank (ADB) projection, Bhutan’s economy will grow by 7.5% with the operation of new hydro plants, decision to reopen international tourism and economic activities resuming.

Meanwhile, the fiscal deficit for the Fiscal Year (FY), is estimated at Nu 18.944bn corresponding to 8.56% of the Gross Domestic Product (GDP). This is based on the projected resources and expenditure. “The deficit financing will be explored through concessional external or domestic borrowings,” the report states.

As per the quarterly provisional trade statistics published by MoF, the country’s trade balance for the first quarter (January-March) was Nu 13.8bn in the red, Nu 21.2bn deficit in the second quarter (April-June) and another deficit of Nu 13.7bn in the third quarter last year. Trade deficit is an economic measure of a negative balance of trade, meaning imports exceed exports. A country experiences a trade deficit or negative trade balance if its import bill is more that its earnings from export.

Meanwhile, statistics over the last five years (2018-2022) show that the country’s imports have increased by almost 45%. “The increase in exports struggled at less than one-fourth of the import rate. This shows the dependence of the country’s economy on hydro-power,” the MoF has underscored in the report.

The fiscal deficit remained elevated as resource mobilization was lower compared to increased spending requirements related to the COVID-19 pandemic. For the FY 2021-22, total expenditure increased by 16.4%, while total revenue mobilized was reduced by 12.7% translating to a fiscal deficit of 8.9% of GDP (provisional).

The increase in spending was primarily driven by capital expenditure reflecting a targeted scale-up in public infrastructure projects to support the economic revival. Capital expenditure is estimated to have increased by 25.2% while recurrent expenditure was maintained within the domestic revenue.

On the resources side, domestic revenue exhibited a growth of 8.9% due to an increase in tax revenue by 25.1% mainly stemming from an improved collection in CIT, BIT, PIT, Sales tax, and Green tax. Grants remained on a lower end with receipt of 61.7% only compared to the budgeted amount

Meanwhile, in FY 2022-23, the fiscal deficit is estimated at 9.0% of GDP as government spending continues to accelerate economic recovery. The total expenditure is estimated to increase by 8% with a capital budget of Nu 38.5bn, which is one of the highest, constituting 51.5% of the total outlay.

Domestic revenue is revised from an estimated Nu 36.4bn to Nu 41.3bn, with the inclusion of royalty from the tourism industry and broad-based improvement in the collection from both direct and indirect taxes.

In terms of grant mobilization, the residual amount of the 12th FYP amounting to Nu 14.8bn is estimated to be received in the current FY.

In an earlier interview, Finance Minister Namgay Tshering said that Bhutan’s economic growth in 2023 is expected to grow to 5.3%, which means, the growth is likely to re-accelerate as global growth recovers, drag from net exports diminishes and the investment cycle picks up.

“If there is more government expenditure including ongoing government infrastructure and projects this year, the Gross Domestic Product (GDP) will be lingering between 3.5% to 4%,”Lyonpo had stated.

Sherab Dorji from Thimphu