The Ministry of Finance (MoF) has revised Bhutan’s GDP growth projection for the first quarter of Fiscal Year 2024-2025 to 4.97%, down from the previous estimate of 6.13%. The downward adjustment is attributed primarily to the postponed commissioning of the Punatsangchhu-II Hydroelectric Project (PHPA-II) to June 2025 and a reduction in the tourism target from 200,000 to 150,000 arrivals.
The industrial sector’s weaker-than-expected performance has also dampened growth projections, though the service sector remains a key driver. The service sector is projected to grow by 5.3% in 2024, fueled by wholesale and retail trade (5.0%), transport and storage (7.4%), hotels and restaurants (20.4%), communication (6.0%), and finance and insurance (5.6%). However, this growth is expected to slow to 4.4% in 2025, influenced by reduced real wage growth in public administration. The sector’s outlook depends heavily on the recovery of the tourism industry and achieving the revised target for tourist arrivals.
However, the sector’s growth is anticipated to slow to 4.4% in 2025, largely due to reduced real wage growth in public administration. Public sector wages are a cornerstone of economic activity, particularly in countries or regions where government employment forms a significant portion of the workforce. These wages directly influence consumption patterns, as employees rely on their earnings to meet daily needs, save, or invest. When public sector wages grow steadily, it boosts disposable income, enabling households to spend more on goods and services. This increased spending drives demand across various sectors, from retail and hospitality to transportation and entertainment.
However, a slowdown or stagnation in wage increases can have far-reaching consequences. In urban areas, where living costs are typically higher, public sector employees may curtail discretionary spending, focusing instead on essential expenditures. This reduction in consumer spending directly impacts service industries like restaurants, cafes, retail stores, and recreational services, which depend heavily on urban clientele.
The ripple effect extends beyond immediate service sectors. Reduced consumer demand can lead to slower business growth, job cuts, or reduced hiring, further weakening the local economy. Additionally, industries reliant on urban consumer activity, such as real estate or transportation, may experience declining revenues, creating a broader economic slowdown.
In economies where the public sector is a dominant employer, wage trends can also influence private sector performance. For example, businesses may hesitate to expand or innovate in anticipation of reduced demand. This cycle underscores the critical role public sector wages play in sustaining economic momentum and the importance of balanced wage policies in fostering long-term economic stability.
The outlook for the service sector remains closely tied to the performance of Bhutan’s tourism industry, which is critical for several sub-sectors, including hospitality, transportation, and retail. The revised tourist arrival target of 150,000 for 2024 emphasizes the importance of achieving sustainable growth in visitor numbers. Key strategies include enhancing the visitor experience, diversifying tourist offerings, and ensuring seamless connectivity through improved infrastructure, such as upgraded airports and roads.
Further, the government’s initiatives under the 13th Five-Year Plan (FYP), aimed at fostering innovation, skill development, and digital transformation, could provide additional momentum to the sector. By addressing structural challenges and ensuring a conducive environment for private sector growth, Bhutan can sustain and enhance the service sector’s contribution to the economy in the coming years.
The industrial sector is anticipated to grow by 6.2% in 2024 and surge to 20.1% in 2025, driven by the expected commissioning of PHPA-II. During the 13th Five-Year Plan (FYP), the sector’s average growth is projected at 9.9%, slightly below the target by 0.3%. Growth in the mining and quarrying subsector is expected to rise from 7.0% in 2024 to 14.0% in 2025. Similarly, the manufacturing subsector is projected to grow from 2% in 2024 to 4.6% in 2025, underscoring the need for strategic interventions to boost production and provide employment opportunities for youth.
The power sector’s growth projection for 2024 has been revised downward to 2.9% from the earlier estimate of 5.6%, primarily due to delays in the commissioning of the Punatsangchhu-II Hydroelectric Project (PHPA-II), one of Bhutan’s largest and most anticipated infrastructure initiatives. The delay underscores the significant influence major hydropower projects have on the country’s overall economic performance, as they are critical to driving both domestic energy supply and export revenue.
However, the sector is expected to witness a remarkable rebound in 2025, with growth projected to soar to 19.8%. This substantial growth is attributed to the anticipated commissioning of PHPA-II, which will significantly boost Bhutan’s hydropower capacity and revenue generation through increased energy exports, primarily to India.
The robust outlook for 2025 also reflects Bhutan’s strategic focus on hydropower development under the 13th Five-Year Plan (FYP). In addition to PHPA-II, the government has prioritized investments in both small and large hydropower projects to diversify its energy portfolio and reduce the risks associated with delays in mega-projects. Smaller hydropower plants are being developed to address domestic energy needs more efficiently and enhance energy security, while larger projects aim to strengthen Bhutan’s position as a leading regional exporter of clean energy.
Moreover, the government’s initiatives include the construction of new hydropower plants and upgrades to existing infrastructure, ensuring the sector remains aligned with Bhutan’s long-term vision of leveraging hydropower as a cornerstone of economic growth and sustainability. By harnessing its vast hydropower potential, Bhutan aims to not only meet rising domestic and regional energy demands but also contribute to global efforts to transition towards renewable energy sources.
The anticipated growth in 2025 highlights the critical role of timely project execution, sustained investment, and strategic planning in the power sector. It also reflects Bhutan’s commitment to realizing the full potential of its hydropower resources while ensuring that the benefits of this vital sector contribute to broader economic and social development.
The agriculture sector continues to face challenges, with growth projected at 1.5% for both 2024 and 2025. Growth is expected to be driven by crops (0.6%), livestock (2.4%), and forestry and logging (1.9%). However, these estimates fall short of the 7.0% annual growth target set in the 13th FYP. Initiatives such as farm roads, irrigation channels, fencing projects, and the Concessional Credit Line (CCL) under the Economic Stimulus Program (ESP) aim to address these gaps by improving access to financing and boosting productivity in agriculture, livestock, and forestry.
Bhutan’s revised GDP projections, now forecasting a growth rate of 4.97% for 2024-2025, signify a critical juncture for the country’s economic planning and development. The downward adjustment from an earlier projection of 6.13% reflects challenges such as domestic constraints, including project delays, and external pressures, such as global economic volatility, rising inflation, and geopolitical uncertainties that can affect trade and investment flows.
Experts say that a key factor influencing the revised growth projection is the pace of project execution, particularly in infrastructure development and hydropower projects, which have traditionally been central to Bhutan’s economy. Delays in these projects can disrupt timelines for revenue generation and job creation. Additionally, the domestic private sector faces challenges in scaling up due to limited access to capital, skills shortages, and logistical hurdles.
To address these challenges, targeted interventions are crucial. Sectors such as agriculture, tourism, and manufacturing hold potential for growth and diversification. Strengthening value chains in agriculture, promoting sustainable and high-value tourism, and fostering small and medium enterprises (SMEs) in manufacturing can help create a more balanced and resilient economic structure. Incentives for innovation and digital transformation across industries could also boost productivity and efficiency.
Finally, timely and effective policy execution will be a critical determinant of whether Bhutan meets its revised GDP targets. Policymakers must focus on removing bottlenecks, ensuring financial and administrative efficiency, and maintaining transparency in project execution. Proactive fiscal management, along with efforts to attract foreign direct investment (FDI) in priority areas, can help bridge resource gaps and accelerate growth.
The revised GDP projection serves as both a caution and a call to action. While it highlights existing vulnerabilities, it also underscores opportunities for Bhutan to strengthen its economic foundations. Coordinated efforts across sectors, strategic partnerships, and an emphasis on execution will be key to achieving sustained and inclusive growth.
Sherab Dorji from Thimphu
