Is Bhutan’s trade deficit a problem?

Is Bhutan’s trade deficit a problem?

 A trade deficit occurs when a nation imports more than its exports. A country experiences a trade deficit or negative trade balance if its import bill is more than its export earnings

I am so glad to ask this important question. The size of the Bhutan trade deficit, and its implications for this country’s future, has been a hotly debated topic among academics and policymakers for quite some time.

The answer to this question depends on several factors. Under certain favorable conditions, it is possible that the trade deficit is not a major concern.

Many economists and trade experts do not believe that trade deficits hurt the economy, and warn against trying to “win” the trade relationship with particular countries.

Others, however, believe that sustained trade deficits are often a problem, and there is substantial debate over how much of the trade deficit is caused by foreign governments, as well as what policies, if any, should be pursued to reduce it.

A trade deficit occurs when a nation imports more than it exports. A country experiences a trade deficit or negative trade balance if its import bill is more than its export earnings.

The country’s trade deficit in the second quarter between April to June this year, including trade in electricity, is estimated at around Nu 21.2bn, of which the balance of trade with India alone accounts for more than Nu 12bn in the red.

The country experienced a trade deficit of Nu 13bn in the first quarter of the year and trade with India accounts for Nu 9.2bn of the total trade deficit. This takes the country’s total trade deficit to almost Nu 21.2bn within the first six months of 2022.

According to the provisional trade statistics for the second quarter of this year, Bhutan imported commodities worth more than Nu 35.8bn, which is an increase from Nu 13bn in the first quarter.

Economists generally see these factors as more important than trade policy in determining the overall deficit. That’s because making it easier or harder to trade with specific countries tends to simply shift the trade deficit to other trading partners.

The country’s export value (including electricity) also experienced an increase from around Nu 9.7bn in the first quarter to Nu 13.6bn in the second quarter.

Import, however, hovered around more than Nu 13.2bn in both quarters, meaning that the country imported goods worth more than Nu 35.8bn until June this year.

The deficit is narrowed due to electricity export. Had it not been for the electricity export, the country could have experienced a trade deficit of another Nu 27.2bn in the second quarter alone.

Although exact import and export figures will be released at the end of the year, electricity generation during the second quarter of the year was recorded at Nu 6bn. In the first quarter, which is usually a low generation season (January-March), electricity earning was only Nu 721mn.

The country also imported fuel worth more than Nu 1.9bn in the first quarter, putting diesel and petrol as the two top most imported commodities. In the second quarter, the country imported fuel worth more than Nu 2.5bn.

Processing units form a huge component of import making it to the top 10 list with more than Nu 2.5bn in the first three months of the year. This too increased to Nu 5.2bn in the second quarter, forming a Nu 2.7bn increase compared to the first quarter this year.

What are the arguments against focusing on the deficit?

For many economists, however, the trade deficit has been scapegoated, and they argue that the trade deficit is not itself a problem for the Bhutan economy.

That’s because a larger trade deficit can be the result of a stronger economy, as consumers spend and import more while higher interest rates make foreign investors more eager to place their money in the country.

Bhutan’s top exports include silicon, which earned the country Nu 4.8bn in the first quarter and another Nu 4.3bn in the second quarter.

Figures, however, show that the country’s trade balance began deteriorating since 2013.

The country experienced a trade deficit of Nu 29.1bn in 2019 against Nu 32bn in 2021. This shows that the trade deficit widens by Nu 2bn every year.

Statistics over the last five years (2018–2022) show that the country’s imports increased by almost 45%, and the increase in exports struggled at less than one-fourth of the import rate. This shows the dependence of the country’s economy on hydropower.

The article is contributed by Reporter Kinley Yonten