Bhutan: Economic Outline

Economic Indicators

The economy of Bhutan, one of the world's smallest and least developed economies, is based on agriculture and forestry. However, the main source of revenue is the sale of electricity to India. The country has sustained growth due to the development of the hydroelectric sector and the dynamism of the tourism sector. Bhutan’s economy experienced rapid average annual growth of 7% between 1988 and 2018 (Asian Development Bank, 2023). The economy has undergone significant impacts from a series of external shocks, including the COVID-19 pandemic and the global fallout from Russia's invasion of Ukraine. According to the World Bank, the economy expanded by 4.6% in FY22/23, driven by the reopening of borders for tourism in September 2022. The industry sector grew by 5.1%, driven by increased construction and manufacturing activities, although the electricity sector saw a contraction. The services sector saw 5.0% growth, buoyed by transport- and trade-related services, leading to more job opportunities, particularly in hotels and restaurants. However, tourist arrivals remained below pre-COVID-19 levels due to weakened global consumer confidence and the implementation of the new tourism levy act. The projected real GDP growth rate is expected to decrease to 4% in FY23/24. However, growth is anticipated to be sustained by increased growth in tourism-related services (World Bank).

Measures aimed at pandemic relief amid the pandemic and a downturn in public revenue have led to notable fiscal deficits and increased public debt. Vulnerabilities persist in the financial sector, largely due to a high level of non-performing loans. To drive digital transformation and economic diversification, the state holding company—Druk Holding and Investments—ventured into crypto-mining operations. However, this move resulted in a considerable depletion of international reserves and an expansion of the current account deficit (CAD) due to increased imports of information technology (IT) equipment. The fiscal deficit decreased from 7.7% of GDP in FY21/22 to 5.1% in FY22/23, driven by increased domestic revenue and reduced capital spending. Total revenue rose due to higher non-hydro revenue, indicating the gradual recovery in the industry and services sectors. The fiscal deficit is forecasted to rise to 6.1% of GDP in FY23/24, driven by a surge in current spending following a substantial salary increase aimed at addressing notable staff attrition. Although tax revenue is expected to increase, this will be offset by reduced hydro profit transfers and external grants. Although hydro debt is decreasing, public debt is expected to stay elevated as a proportion of GDP in the medium term due to persistent high fiscal deficits. Risks to debt sustainability are anticipated to remain moderate, primarily because a significant portion of the debt is tied to hydro project loans from India, which carry low refinancing and exchange rate risks. Average inflation eased from 5.9% in FY21/22 to 4.6% in FY22/23, primarily due to a slowdown in imported food inflation. However, non-food inflation stayed high at 5.9%, aligning with price trends in India (from where 70% of Bhutan's imports originate, and the BTN is pegged to the INR). Inflation is expected to remain elevated in the short term owing to higher import prices, before moderating in the medium term. Bhutan is also the first country using the Gross National Happiness index to measure the well-being of its population not only based on economic indicators, but also on other factors summarized in the four GNH pillars: sustainable and equitable socio-economic development, environmental conservation, preservation and promotion of culture, and good governance.

Bhutan is classified by the World Bank as a lower-middle-income nation and has experienced rapid economic expansion, leading to substantial poverty reduction in the past two decades. With an average annual real GDP growth of 7.5% since the 1980s, driven by the public sector-led hydropower industry and robust performance in services like tourism, significant strides have been made. Extreme poverty, defined as living below USD 2.15/day, was eradicated by 2022. Additionally, the proportion of the population living below the USD 6.85/day poverty line for upper middle-income countries decreased from 39.5% to 8.5% between 2017 and 2022. This decline can be attributed to enhanced labor and agricultural productivity, increased income, and remittances, resulting in augmented real per capita consumption, particularly in rural areas. The Gini index, a measure of income inequality, decreased from 37 in 2017 to 28 in 2022 (World Bank, latest data available). However, despite these advancements, vulnerability to poverty and spatial inequality remains a significant challenge. In 2022, the youth unemployment rate, which was already elevated prior to the pandemic, reached 29%, whereas the general unemployment rate stood at 6% as of 2023. The poverty rate is projected to decrease marginally to 0.4% and 7.9% in 2023, based on thresholds of USD 3.65/day and USD 6.85/day, respectively. Nonetheless, approximately 7% of the population will remain vulnerable to poverty (World Bank).

Monetary Indicators	2016	2017	2018	2019	2020
Bhutan Ngultrum (BTN) - Average Annual Exchange Rate For 1 GHS	16.84	14.97	14.91	13.54	13.24

Source: World Bank - Latest available data.

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Latest Update: May 2024