Having experienced a growth of 4 percent in 2017, the Asian Development Bank (ADB) has projected a growth of six percent in the medium term and highlighted four key risks facing the Bhutanese economy.
According to the ADB’s publication “Bhutan Development Update” the size of hydropower projects relative to the size of the economy could negatively affect the country’s revenue and export should there be any further delays in hydropower construction.
For instance, both the hydropower projects in the Punatsangchhu basin were rescheduled several times. It is estimated that one year delay could reduce the GDP growth by 3-4 percentage points.
As the country prepares to graduate from the group of LDC, the ADB stated that donor financing is getting scarce while domestic debt markets are not yet developed. “Limited financing sources could constrain development spending and negatively affect future growth and development,” the report stated.
Policy uncertainty after the 2018 general election could affect growth and investment, which in turn may impact the economy.
The ADB also highlighted that ensuring a vibrant, job-creating private sector remains a longer-term challenge.
In preparing to face these challenges, the country has already initiated reforms such as economic diversification and financial strategy.
“Maintaining reform momentum after the 2018 general election will be crucial,” according to the ADB. “Bhutan’s reform momentum slowed in mid-2018.” For example, during the interim government between August and October 2018, few strategic decisions are made. It is also stated that if the formulation of the FY2018/19 budget and endorsement of the 12th FYP are delayed, there would be a negative impact on growth is expected
ADB also projected economic growth to average 6 percent a year over the medium term supported by ongoing hydropower projects and the services sector, especially tourism.
On the supply side, services including financial services and tourism will remain the main drivers of growth. With the completion of the Mangdechhu hydropower project in late 2018, it is stated that the growth rate of industry, especially construction, is likely to moderate.
On the demand side, private and public consumption will be the main drivers of growth. Exports are projected to gradually increase after FY2019/20 and imports are expected to decline because of lower capital goods imports for hydropower.
This improvement in the trade balance will help narrow the current account deficit to 12 percent of GDP by FY2020/21. The external debt to GDP ratio is also expected to decline to 88 percent.
As hydropower projects contribute little to job creation, the direct impact of growth on poverty reduction is expected to be modest. Likewise, the transition in farming industry to a productive sector is expected to happen at a slow pace.