Balanced development is a must: World Bank

World Bank Reports Strong Recovery of Bhutan’s Economy Post-COVID19

But challenges such as fiscal deficits, labor market dynamics, and the need for economic diversification persist, requiring continued attention and policy interventions

According to two recent World Bank reports, Bhutan’s economy is exhibiting strong signs of recovery from the COVID-19 pandemic. The Bhutan Development Update from April 2024 projects a robust 4.6% real GDP growth for FY22/23, spurred by resurgence in tourism. This follows a contraction over two consecutive years. Growth is anticipated to further accelerate to 4.9% in FY23/24.

Abdoulaye Seck, the World Bank Country Director for Bangladesh and Bhutan, commented, “To sustain strong and inclusive growth, Bhutan could enhance its business environment to attract more foreign direct investments and promote the private sector, thereby creating desirable job opportunities for its citizens. Additionally, it is crucial for the government to address the increasing stress on service delivery due to human resources challenges promptly.”

Despite the recent robust growth, the economy faces several risks. The fiscal deficit is expected to widen to 5% of GDP in FY23/24 as expenditures, including significant public sector salary raises, outpace revenues. International reserves have shown signs of stabilization after a notable decline, with the current account deficit beginning to narrow in the first quarter of FY23/24 after expanding significantly in FY22/23. Key risks include delayed fiscal consolidation, vulnerabilities in the financial sector, volatile international commodity prices, and delays in hydropower projects.

The reports also highlight issues in the labor market, noting that employment in Bhutan predominantly remains in low-productivity sectors. Challenges include limited inclusion of women in meaningful employment and persistent low-productivity agricultural jobs. The quality of employment outside the public sector is poor, leading to public sector queuing, rising urban unemployment, and a record number of Bhutanese migrating abroad.

The 2023 Public Expenditure Review for Bhutan underlines the importance of efficient public spending and enhanced domestic resource mobilization to support the country’s long-term development goals. While revenue collection is heavily reliant on the hydropower sector, contributions from direct taxes, excluding hydropower, have stagnated. Bhutan’s capital expenditure as a share of GDP ranks among the highest globally, with a significant portion going towards salaries and allowances. Although the commitment to education and healthcare remains strong, there are opportunities to improve spending efficiency.

Hoon Sahib Soh, World Bank Practice Manager for Macroeconomics, Trade & Investment for the South Asia Region, suggests, “Increasing contributions from direct taxes beyond the hydropower sector, coupled with a more effective tax administration system, could significantly enhance Bhutan’s revenue generation capabilities, which are essential for its development.”

State enterprises in Bhutan play a vital role in generating budget revenues and creating employment but face profitability and performance challenges. Despite enhancements in the legal and regulatory framework governing state enterprise management, gaps in policy including those related to ownership and dividends, remain.

Adama Coulibaly, World Bank Resident Representative for Bhutan, noted, “Further improvements in investment management, corporate governance, and financial reporting can enhance the performance of state enterprises and reduce fiscal risks.”

Efforts to bolster Bhutan’s economy include a focus on efficient public spending, enhanced domestic resource mobilization, and diversification of revenue sources beyond the hydropower sector. Additionally, there are calls for improvements in managing state enterprises, including investment management, corporate governance, and financial reporting, to reduce fiscal risks and enhance performance.

In summary, Bhutan’s economic situation post-COVID-19 is marked by a strong recovery trajectory, but challenges such as fiscal deficits, labor market dynamics, and the need for economic diversification persist, requiring continued attention and policy interventions.

By Tashi Namgyal, Thimphu