By Usman Khan

The small country of Bhutan across mountainous terrain in the heart of the Himalayas has one of the world’stiniest and smallest developed economies based on farming and forestry. However, the central source of revenue is the sale of electricity to India. The country has a continued growth due to the development of the hydroelectric sector and the vitality of the tourism area. Development was estimated to have raised to 5.3% in 2019 from 3.7% a year previous advanced power exports and domestic consumption provided support. This was also 0.4 percentage point higher than IMF's earlier estimation for growth. A reduction in tourism revenue in 2020 and 2021 due to the coronavirus epidemic and communal quarantine measures has jeopardized the financial stability and economic growth. GDP is expected to lose -1.9% in 2021, after shrinking by an estimated 0.8% in 2020. However, economic growth is supported by the hydropower sector, and in 2022 it is predictable to reach 5.7%.

The government has been working on devolution from national to local governments, by expanding the share of resources allocated and by increasing their authority and functions. National self-sufficiency and inclusive socio-economic growth also remain among the pillars of the new five-year plan, meaning the government will pursue an expansive budgetary policy. Debt-to-GDP ratio spiked from 106.6% in 2019 to 120.7% in 2020; however, most debt is considered sustainable as they are covered by financial arrangements with India under which the latter finances the construction of hydropower plans in Bhutan in exchange of power imports. At the same time, government liability is anticipated to increase to 123.4% this year.

Bhutan modified its tourism policy in order to attract more tourists, who are not subjected to the daily tourism tax of USD 250. Due to this modification, the number of tourists increased substantially. Inflation is closely linked to the Indian economy as Bhutan's domestic currency ngultrum is attached to the Indian rupee. Inflation increased to 4.2% in 2020, against 2.8% in 2019 and to rise further to 4.9% in 2021/22 as the rupee loses value against major international currencies and food prices rise in the country. Fiscal deficit is forecast to widen to 4.9% by 2021 before stabilizing in the medium term amid rising revenue collection. Bhutan is seeking to expand the base for the green tax by including tourist vehicles.

Bhutan remains a poor country, where living conditions are made difficult by hilly areas and a poor-quality infrastructure. However, GDP per capita doubled between 2004 and 2014 whereas the poverty rate fell to 9.9% in 2019. Unemployment remained low at 2.4% in 2020 unchanged from a year earlier (2.3%). Bhutan is also the first country using the Gross National Happiness index to enhance the well-being of its population not only based on economic indicators but also on sustainable and equitable socio-economic development, environmental conservation, preservation and promotion of culture and good governance.

Economic growth in Bhutan is forecast to contract by 3.4% this fiscal year (FY) 2021 from 0.9% in FY2020 on account of strict pandemic restraint measures, including two lengthy nationwide lockdowns that down-graded the economic activity across sectors, according to a new report by the Asian Development Bank (ADB). The Asian Development Outlook (ADO) 2021, ADB’s flagship annual economic publication says economic growth is expected to recover moderately to 3.7% in FY2022 with strong policy responses to the coronavirus disease (COVID-19) pandemic, including the country’s vaccination drive.

 “Inflation is expected to remain elevated on higher prices for food and transportation. Risks to the growth outlook tilt to the downside, particularly slower than expected revival in tourism amid renewed virus outbreaks with new variants. ” Inflation is expected to rise 6.4% in FY2021 due to supply chain disruption and panic buying. However, inflation is forecast to ease to 5.3% in FY2022 as prices are expected to trend lower in India and domestic conditions improve. The current account deficit will moderate to 7.7% of gross domestic product (GDP) in FY2021 as imports contract on falling domestic demand. In FY2022, imports are forecast to revive on recovery in investment and private consumption, boosting the current account deficit to 10.4% of GDP.

The government of Bhutan should resolve nonperforming loans (NPL) to strengthen financial stability and contain their impact on the broader financial system, which remains critical including granting more autonomy to financial institutions in how they restructure loans, and capital strengthening through measures to improve credit underwriting at both banks and nonbank financial institutions (NBFI) and the introduction of NBFI stress-testing for credit exposure. ADB has been supporting Bhutan since 1982, concentrating its efforts on programs and projects in energy, transport, finance, and urban development. ADB has committed loans totaling $584.06 million, grants of $269.22 million, and technical assistance worth $57.23 million for Bhutan. Cumulative loan and grant disbursements to Bhutan amount to $728.5 million. In 2020, ADB responded swiftly to assist with the government’s most urgent pandemic needs through a combination of program loan, investment projects, grants, and technical assistance worth $108.9 million. Overall assistance aims to help promote reforms, support inclusive growth, domestic resource mobilization and environmental sustainability. ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty.

Economic recovery is needed to be backed by swift and strong policy response by the government, including the nationwide vaccination drive that started on 27 March 2021 with over 90% of population received the first dose in a week, restoring mobility and economic activity; strong government investment spending; and global economic recovery, reviving tourism moderately. However, it is anticipated that the Bhutan’s upward growth trajectory is possible because the country fulfills its enormous potential for hydropower and as key drivers it has means and sources to generate growth, development and prosperity, with the hydropower industry, agriculture and forestry. Bhutan needs plans to up-grade its production market.