Bhutan’s economy is expected to grow at a solid, if less spectacular, pace in 2026. According to the Ministry of Finance’s latest macroeconomic outlook, real GDP is forecast to expand by 6.86% in 2026, down from an estimated 8.71% in 2025. The slowdown represents a return to more typical growth after a year boosted by exceptional gains in hydropower generation.
At first glance the outlook appears reassuring. Growth remains robust by regional standards and is projected to average above 6% over the medium term, reaching about 7.4% in 2027. Yet beneath the headline figures lies a more complex picture: an economy heavily dependent on public investment, constrained by weak domestic demand and increasingly exposed to external imbalances.
The key question is not whether Bhutan will grow in the coming years, but whether that growth will become more balanced and resilient.
Hydropower’s dominance persists
Industry will remain the primary driver of economic expansion in 2026, contributing nearly four percentage points to overall GDP growth. Hydropower construction and infrastructure spending continue to dominate economic activity, reflecting Bhutan’s long-standing strategy of financing development through electricity exports.
Electricity generation surged in 2025 following the commissioning of the Punatsangchhu-II project, providing a significant one-off boost to growth. Output is expected to stabilise in 2026 as the effects of new capacity fade. The slowdown is largely mechanical rather than structural, but it illustrates how closely economic performance depends on the timing of major projects.
Construction activity is expected to accelerate as work continues on hydropower and infrastructure projects. Rising capital expenditure will sustain industrial output even as electricity growth normalises. Yet this pattern underscores a structural feature of Bhutan’s economy: growth driven by investment in a narrow range of sectors.
Hydropower remains Bhutan’s greatest comparative advantage, but heavy reliance on a single sector exposes the economy to project delays, financing constraints and climatic risks. Any disruption to project implementation could quickly translate into slower growth and fiscal pressure.
A hesitant services recovery
The service sector—particularly tourism—has yet to regain strong momentum. Growth projections for 2025 and 2026 have been revised downward following lower-than-expected tourist arrivals. Tourism remains a key source of employment and foreign exchange, yet the recovery has been uneven and vulnerable to global conditions.
Visitor numbers are expected to improve gradually, but the outlook remains cautious. High travel costs, shifting tourist preferences and global economic uncertainty continue to weigh on demand. Bhutan’s high-value tourism model preserves environmental and cultural integrity, but it also limits rapid expansion and leaves the sector sensitive to external shocks.
A sustained recovery in services will be essential if growth is to become more inclusive. Hydropower generates substantial revenue but relatively few jobs; tourism and related services offer broader employment opportunities, particularly for young people entering the labour market.
Investment without consumption
The demand-side picture reveals a notable imbalance. Economic activity in 2026 will be driven primarily by investment, especially public investment. Capital expenditure is expected to rise significantly, with hydropower and infrastructure projects absorbing the bulk of resources. Private investment is forecast to increase by about 5.7%, largely linked to project-related construction.
Consumption, by contrast, is expected to weaken. Private consumption is projected to decline by roughly 3% in 2026, reflecting pressure on household purchasing power. The anticipated inflationary effects of the goods and services tax are expected to erode real incomes and dampen spending.
Weak consumption is a warning sign. Sustained economic growth typically depends on rising household incomes and confidence. An economy that relies heavily on public investment risks becoming vulnerable to fiscal tightening or delays in capital projects.
Government consumption is projected to grow by about 4.3%, supported by steady recurrent expenditure. But public spending alone cannot substitute indefinitely for private demand. Stronger private-sector expansion will be necessary to sustain growth over the longer term.
External imbalances widen
Bhutan’s external position presents another challenge. The current-account deficit is expected to widen in the near term as infrastructure development drives up imports of machinery, equipment and construction materials.
Exports—dominated by hydropower—are unlikely to keep pace with rising imports. As a result, the contribution of net exports to GDP growth is projected to fall sharply in 2026.
Large trade deficits are not unusual during periods of heavy infrastructure investment, particularly in small developing economies. But persistent deficits increase dependence on external financing and expose the economy to shifts in external conditions.
Bhutan’s close economic ties with India provide a measure of stability, yet reliance on a narrow export base limits resilience. Expanding non-hydropower exports—such as agricultural products, niche manufacturing or digital services—would help reduce vulnerability to external shocks.
Growth with structural constraints
Over the medium term, Bhutan’s growth prospects remain favourable. Continued hydropower development and a gradual recovery in tourism are expected to support expansion averaging above 6% annually. Yet these projections depend heavily on the timely completion of major projects and supportive external conditions.
The risks are clear. Delays in hydropower construction, cost overruns or financing constraints could weaken growth and strain public finances. Slower tourism recovery would reduce employment and foreign-exchange earnings, while persistent trade deficits could put pressure on reserves.
More fundamentally, Bhutan’s growth model remains concentrated in a few sectors and dependent on public investment. While this approach has delivered steady progress, it may prove less effective in an environment of tighter financing conditions and slower global trade.
The case for diversification
If Bhutan is to sustain strong growth while improving resilience, economic diversification will be essential. Hydropower will remain central to development, but it cannot be the sole pillar of expansion.
Encouraging private-sector development should be a priority. Improving access to finance, reducing regulatory barriers and investing in skills could help stimulate new industries. Small and medium-sized enterprises, particularly in services and agro-processing, could broaden the economic base while generating employment.
Tourism policy may also require careful calibration. Maintaining Bhutan’s high-value approach while gradually expanding visitor numbers could create jobs without undermining environmental objectives.
Managing public investment effectively will remain equally important. Hydropower projects must be completed on schedule and within budget if they are to deliver expected returns, while fiscal policy will need to balance development spending with long-term sustainability.
Steady, but not secure
Bhutan’s economy appears set for steady growth in 2026, supported by infrastructure investment and hydropower development. The outlook is broadly positive, but it remains narrowly based.
Investment-led expansion can sustain growth in the short term. Over the longer run, stronger consumption, diversified exports and a more dynamic private sector will be needed to ensure that growth remains durable and inclusive.
The coming years will test Bhutan’s ability not merely to maintain growth, but to reshape it into a more balanced and resilient model.
Sherab Dorji
From Thimphu
