Economy expected to pick up

Bhutan’s economy is expected to grow to 4.9% in FY 2023/24, 0.9 percentage points more than previously projected, boosted by higher electricity production, increasing mining and manufacturing output, and stronger tourism-related service activities after the reduction of the tourism levy.

Growth is expected to pick up further to 5.7% in FY 2024/25 amid recoveries in industrial activity outside the hydropower sector and in services. The ending in December 2023 of the moratorium on housing loans is expected to increase imports and contribute to current account pressures. The main risks to the growth forecast are further delays in hydropower projects, delayed fiscal consolidation, and rising and volatile commodity prices due to geopolitical tensions.

In Bhutan, growth was stronger than expected in 2023 and forecasts have been upgraded for 2024–25, largely reflecting strong exports of hydroelectricity and the re-opening of borders in late 2022. The government has partially relaxed the tourism levy imposed on non-Indian foreign visitors, but the number of visitors is still well below pre-pandemic levels.

Private sector credit grew by 19% in FY 23, the highest growth rate in the past three years. Nonperforming loans in the banking sector decreased to about 4% of total loans in September 2023, and other financial soundness indicators, such as regulatory capital and liquidity, also improved.

South Asia’s current account deficits have narrowed since 2022, but remain above the Emerging Markets and Development Economies (EMDE) average. The double digit current account deficits of the region’s two small states (Bhutan and Maldives) are expected to rank among the decile of EMDEs with the widest deficits relative to GDP.

South Asia was the fastest growing EMDE region in 2023, a distinction that is expected to continue this year and next largely due to strong growth in India. As global growth is projected to ease this year, growth in South Asia is also expected to moderate to 6.0%; faster than projected in the 2023 edition of the South Asia Development Update, due to the strength of India, and gradual recoveries in countries that had faced recessions in 2022–23. Growth in South Asian economies other than India and Bhutan is projected to remain well below pre-pandemic averages, and growth in South Asia’s financially stressed economies is expected to pick up somewhat more slowly than in their peers. Growth in the region is more reliant than elsewhere on the public sector. This may be difficult to sustain given weak fiscal positions around the region.

Reducing subsidies or budgetary support to state-owned enterprises in Bhutan, Nepal, and Pakistan could allow greater private sector participation, while also increasing the room in state budgets for other programs. Similarly, in Pakistan, state-owned enterprises tend to have low investment rates, while consuming government resources equivalent to about 23% of the fiscal deficit in FY 2023. Better governance of state-owned enterprises and a more level playing field could improve the allocation of capital.

In the second half of 2023 and beginning of 2024, current account balances improved in most South Asian countries, helped by rising remittance inflows, recovering tourism, and continued import compression due to previous import restrictions.

South Asia is expected to remain the fastest growing EMDE region in 2024–25. After the upward surprise in growth in 2023, growth in South Asia is projected to moderate to near-potential growth rates. Growth in 2024 is expected to be 6.0%. South Asia’s growth outlook is somewhat stronger than in the previous edition of this report, by 0.4 percentage points for 2024 and 0.3 percentage points for 2025.

By Tashi Namgyal, Thimphu