Nu 5.4bn trade deficit in second quarter of 2021

Trade deficit to grow to 12.5% of GDP in FY 2021/22

The trade deficit is projected to improve from the FY 2022/23 onwards

The current account imbalance is expected to recover in the medium-term due to gradual relaxation in trade restrictions and financial flows coupled with the completion of major hydropower projects, according to the annual report of the Royal Monetary Authority (RMA) released recently.

The report states that with the increase in the volume of trade, the overall trade deficit is expected to increase to 12.5% of the GDP in the FY 2021/22 from 7.3% of the GDP in the previous year, largely contributed by the increase in imports against a marginal increase in exports.

However, the trade deficit is projected to improve from the FY 2022/23 onwards with hydropower export expected to grow by 27.4% with the commissioning of two new hydropower projects in 2023.

In addition, total import is anticipated to increase by 17.7% of Nu 77,342.1mn in the FY 2021/22, witnessing a decreasing trend from the FY 2022/23 onwards in the medium-term.

According to the report, with the improvement in the economic conditions over the medium-term, the receipts related to services are expected to improve, against a higher increase in payments for services.

The report states that with payments surpassing the receipts, the net services payment is expected to increase by 35.1% in the FY 2021/22. With the deterioration of trade balance by 80.4% combined with higher payments in primary income account by 23.0%, the current account deficit is expected to deteriorate by 48.4% during the FY 2021/22, amounting to Nu 30,852.7mn.

Further, a positive capital and financial net flows in the form of official grants, hydro-related and concessional loans is expected to decline by 1.6% in the FY 2021/22, owing to a decrease in hydro loan disbursement.

However, the net surplus in the capital and financial account will be sufficient to finance the current account deficit over the medium term.

Meanwhile, corresponding to these developments, Bhutan’s overall balance is expected to remain positive at Nu 8,245.3mn during the FY 2021/22.

As a result, the gross international reserves are expected to increase by 7.2% from Nu 115,039mn in the FY 2020/21, sufficient to finance 19 months of merchandise imports and 28 months of essential imports.

The report states that the macroeconomic vulnerabilities posed by the pandemic have significant risks to the health of the financial sector as it impinges on asset quality, capital adequacy, and profitability of financial institutions. With limited opportunities for private investment due to the low level of public investment, the credit flow in the economy has been constrained.

However, with the ongoing economic recovery effort and increase in demand for credit, the private sector credit growth is estimated to increase by 8.0% in the FY 2021/22 from Nu 142,821mn in the FY 2020/21. Subsequently, the money supply is expected to grow by 14.4% in the FY 2021/22 and 17.9% in the following year.

Kinley Yonten from Thimphu