RMA’s policy statement sheds light on importance of tourism
Bhutan’s economy is estimated to experience a growth of 4.5 percent in 2023 to 5.2 percent in 2024 and 8.3 percent in 2025, according to figures released by the Royal Monetary Authority (RMA), in its Monetary Policy Statement 2024. While all sectors are equally important, the significance of the services sector, especially tourism is evident from the RMA’s statement.
As per the report, the growth in the domestic service sector is predicted to grow from 5.9 percent in 2023 to 10.7 percent in 2024 and 6.5 percent in 2025. “The vigorous progress in the service sector is expected to result from the inflow of tourists, which results in growth of Tourism, Hotel & Restaurant sectors that are further expected to translate into growth of Transport, Storage & Communications,” the report underlines. The service sector in 2023 and 2024 is primarily driven by 14.3 percent and 16.2 percent in the development of hotel and restaurant sectors respectively.
Additionally, tourism features as the main catalyst for reducing unemployment. The RMA says that unemployment rate is expected to fall from 3.5 percent in 2023 to 3.3 percent in 2024 and 3.0 percent in 2025 with an expected increase in an inflow of regional and international tourists. “The intensification of tourist influx is likely to inflate employment growth in major economic activities and business entities such as the tourism sector, hotel and restaurant sector, and cascading to intermediary sub-sectors like transportation, storage and communication; and handicraft sectors.”
Close on the heels is the 13.4 percent in Transport, Storage & Communications in 2023 and 8.6 percent in Wholesale & Retail sector in 2024. The industry sector is anticipated to pick up growth from a negative growth rate of 4.9 percent in 2023 to 4.6 percent in 2024 and 17.1 percent in 2025. “The expectation of improvement in the industry sector results from the surge in domestic consumption and investment. The industry sector which is estimated to contribute 1.5 percent to the total GDP growth rate in 2024 is expected to grow, which has significant growth in electricity and water (5.6 percent from a negative growth rate of 8.3 percent in 2023) and construction (3.4 percent from the negative growth rate of 7.9 percent).”
Meanwhile, the Mining & Quarrying sectors are anticipated to witness a growth of 8.4 percent in 2024. However, the Manufacturing sector is predicted to observe a decline in growth rate to 2.9 percent compared to 4.5 percent in 2023. The RMA’s report says the Agriculture, Livestock & Forestry sector is also projected to slow growth from 1.8 percent in 2023 to 1.6 percent during 2024 and 2025. “The Agriculture & Livestock sector is predicted to decline from 2.2 percent in 2023 and 1.5 percent in 2024 which supports the falling trend in the share of employment in the agriculture sector as per the Labor Force Surveys.” However, the growth in Forestry & Logging is expected to grow from negative 0.2 percent in 2023 to 0.8 percent in 2024 and 1.7 percent in 2025.
On the demand side, the total consumption is estimated to grow from negative 21.7 percent in 2023 to 2.7 percent in 2024 and deteriorate to negative 8.1 percent in 2025. The expected improvement in total consumption in 2024 is led by a slight enhancement in public consumption and significant growth in private consumption.
The policy statement further adds that the total investment is estimated to converge from negative 10.2 percent in 2023 to negative 0.1 percent in 2024 and a considerable increase in 2024 with 15.9 percent.” Although government spending on machinery and equipment dropped significantly in 2024, the substantial escalation in government investment in construction offset the overall growth rate of government investment, which narrowed from negative 51.5 percent in 2023 to negative 20.7 percent in 2024,” the RMA notes.
While private investment is slowly improving from 2.6 percent in 2023 to 2.9 percent in 2024, the RMA expects an enormous leap in 2025 with 12.7 percent.
According to the policy statement, the main contribution to the growth rate of private investment emanated directly from the higher growth rate of private spending in construction in all years except for 2025 which is largely contributed from private spending in machinery and equipment.
Further, the fiscal deficit for FY 2022/23 stood at 4.6 percent of GDP (Nu 11,222.1 million). This is estimated to increase at 5.6 percent of GDP (Nu 15,044.0 million) in FY 2023/24. An increase in deficit is mainly due to 46.6 percent decrease in official grants and 10.3 percent rise in expenditure compared to FY 2022/23. The total government expenditure for FY 2023/24 is estimated at Nu 76,377.0 million against the total revenue of Nu 61,333.1 million.
Of the total resources, domestic revenue is estimated to grow by 16.2 percent to Nu 52,132.6 million, while external grants are expected to decrease by 46.6 percent to Nu 7,664.2 million during FY 2023/24. Additionally, the current expenditure is anticipated to rise due to a salary hike for public servants. Looking forward to FY 2024/25 and FY 2025/26, the fiscal deficit is projected to decline to 5.2 percent (Nu 15,972.2 million) and 2.5 percent (Nu 8,605.5 million) respectively.
A significant improvement in the fiscal balance is attributed to the commencement of the 13th Five Year Plan (FYP), which includes increased mobilization of domestic revenue and official grants. Domestic revenue is expected to grow by 5 percent to Nu 54,749.9 million in FY 2024/25 and by 15.3 percent to Nu 63,116.4 million in FY 2025/26, largely due to the commissioning of the PHPA-II and higher tax revenue collection following the implementation of tax reforms. On the operating balance front, domestic revenue is expected to finance current expenditure in the medium term, in accordance with the constitutional mandate.
The fiscal deficit will be financed through a combination of domestic and external borrowings. Domestic borrowings will be raised through the issuance of short-term treasury bills and longterm govt. bonds. During FY 2023/24, internal borrowings are estimated at Nu 11,059.2 million, compared to external borrowings of Nu 11,901.4 million. However, in the medium term, domestic borrowings are projected to exceed external borrowings.
By Sherab Dorji, Thimphu
