Hydropower construction delays to affect economy

Bhutan maintained solid growth and macroeconomic stability in the first half of 2017. However, delays in hydropower construction could affect macroeconomic prospects in the coming years, according to the World Bank report on the Bhutan economic update.

Given the size and importance of hydropower projects in the economy, delays are likely to have significant negative impact on growth, revenues and exports although the economy is still expected to expand by 6.9% in 2018.

The Bhutan economic update reports on and synthesizes recent economic development and places them in a medium-term and regional and global context. It analyzes the implications of these developments and policies on the outlook of Bhutan’s economy.

“Good news is that Bhutan maintained solid growth and macroeconomic stability in the first half of 2017. Lending growth rates are strong. Consumer price index, exchange rates, gross international reserves show macroeconomic stability,” said World Bank’s Resident Representative for Bhutan, Yoichiro Ishihara.

As of June this year, consumer price index (CPI) increased by 4.9% compared to the same month in 2016. Gross international reserves exceeded USD 1bn, equivalent to 10 months of imports of goods and services. Exchange rates have been stable or slightly appreciating against the USD in 2017.

“However, macroeconomic prospects are not as bright as six months ago. Planned completion years of the Punatsangchhu I and II hydropower projects have been delayed by one to two years. Given the size of the projects, the delays are likely to have negative impacts on the economy through growth, exports and government revenues,” said Yoichiro Ishihara.

GDP growth rates are projected to be 6.5-7.5% in the coming years.

The Bhutan economic update points out four downside risks to growth, which includes further delays in hydropower construction. The World Bank’s Resident Representative said that the geological problem that caused the delay in Punatsangchhu I has not yet been fully resolved. Further delays will negatively affect macroeconomic prospects in the medium term.

The other downside risks is financing budget. The delays in hydropower construction and the increase in expenditures have left a recourse gap in the budget unidentified. Unless financing sources are identified, the recourse gap will negatively affect growth and development.

Impact of India’s Goods and Services Tax (GST) would also downside the risks to growth. If the trade disruptions caused by India’s GST continue, they are likely to have a negative impact on economy.

Natural disasters would also downside the risk to growth. Bhutan is vulnerable to natural disasters such as floods and landslides. Heavy rains have resulted in landslides and domestic connectivity is affected.

Dechen Dolkar from Thimphu