Insights into Bhutan’s Economic Parameters

Asian Development Outlook (ADO) 2024 highlights the need to adopt an innovative and inclusive financial strategy to engage private sector

To achieve the goal of becoming a more prosperous economy by 2034, the Asian Development Outlook (ADO) 2024 outlines that Bhutan needs to adopt an innovative and inclusive financing strategy that engages the private sector. The report showcases that growth decelerated in 2023 as industrial output contracted. Inflation eased and the fiscal deficit moderated, but the current account deficit remained elevated. However, growth would revive in 2024 and accelerate in 2025 as a major hydropower plant comes on stream. Inflation will edge up this year before moderating in 2025, as will the current account deficit.

Meanwhile, economic growth decelerated from 5.2% in 2022 to 4.0% in 2023, primarily due to a downturn in the industry sector. Industrial output declined by 4.4%. Conversely, services expanded by approximately 9.4%. Agriculture saw modest growth of 1.3%, On the demand side, growth was supported by continued expansion in consumption expenditure. Private consumption expenditure grew by 3.5%, while public consumption expanded by 2.4%. The transition between the 12th and 13th Five-Year Plans delayed investment in the latter half of 2023, and a credit moratorium on commercial housing and hotel construction stifled private sector investment. Consequently, gross fixed investment shrank by approximately 4.9% in 2023. Inflation eased to 4.2%. The budget deficit narrowed due to higher revenue and grants, decreasing from 7.0% of GDP in fiscal year 2022 to 6.7% in FY 2023. Revenue and grants expanded from 25.1% of GDP in FY 2022 to 25.7% in FY 2023.  Domestic public debt decreased to 11.4% of GDP in 2023, attributed to improved revenue from direct taxes and settlement of outstanding facilities. Debt service amounts to 32.4% of domestic revenue, indicating a moderate risk of debt distress.

Despite a 21% decline in net foreign assets of the banking system, money supply grew by 6.7%. Private sector credit surged by 15.5%, signaling robust demand for private investment. The current account deficit shrank to approximately 25.2% of GDP in 2023, down from 31.2% in 2022, reflecting narrower deficits in goods and services trade. While electricity exports plummeted by 23%, other exports rose by 5.4%. The majority of Bhutan’s external debt, 64.3%, was owed to India, primarily hydro debt, deemed self-liquidating under a long-term power purchasing agreement.

Modest growth of 4.4% is forecast in 2024 before marked acceleration to 7.0% in 2025. Services growth will underpin 2024 GDP growth, and greater hydropower generation in 2025 will boost growth in 2025. Services are forecast to expand by 6.5% in 2024 as tourist arrivals reach 60% of the 2019 level before the pandemic. Industry output will rebound to 2.5% on an upswing in all its constituents aside from construction.

A contribution from the newly commissioned Nikachhu hydropower plant in early 2024 will add to growth. However, the continuation of the credit moratorium on the construction of commercial buildings and real estate until mid-2024 and a slow start to the 13th Five-Year Plan activities will drag down construction by 2.2% in 2024, before a rebound in 2025.

Agriculture growth will remain steady but sluggish at 1.4% in the forecast years. The contribution from services will remain strong in 2025, with services forecast to grow at 5.7% on steady growth in tourist arrivals. Industry output is forecast at 15.6% in 2025, driven by double-digit growth in electricity and construction, supported by resumed construction on the 600-megawatt Kholongchhu hydropower plant in 2025.

The expected full commissioning of the Punatsangchhu II hydropower plant will raise industrial output markedly and add close to 5 percentage points to GDP growth in 2025. Private consumption will grow by 4.6% in 2024 on higher tourism earnings and the increase in civil service salaries. Consumption growth is estimated to hold steady in 2025. The budget deficit is projected to widen to 8.3% of GDP in FY 2024 due to a drop in grants and transfers to less than half of the previous fiscal year. It will narrow to 2.4% in FY 2025 on a near tripling of grants already committed for the implementation of the 13th plan and on transfers from full operation of the Punatsangchhu II plant. The current account deficit will widen in 2024 before narrowing in 2025. The deficit is projected at 28.8% of GDP in 2024, 3.7 percentage points wider than in 2023.

Headline inflation is projected to rise slightly to 4.5% in 2024 and moderate to 4.2% in 2025. Bhutan will moderate in 2025.

By Tashi Namgyal, Thimphu