Bhutan’s economy is rebounding after a slowdown caused by the shortage of Indian currency in 2012 and 2013, according to the latest Asian Development Bank (ADB) report.

The ADB Outlook 2017 released earlier this month, projects Bhutan’s GDP growth to reach 9.9 percent in 2018 from a record low of 2.05 percent in 2013. However, the 9.9 percent target is based on the assumption that Punatsangchhu I and II are commissioned as planned earlier.

Commissioning of the country’s two largest hydropower plants – 1,020 MW Punatsangchhu II and 1,200 Punatsangchhu I – are now pushed to 2020 and 2023, respectively. This means it would be challenging to achieve the projected growth of 9.9 percent in 2018.

Punatsangchhu II was initially scheduled to be commissioned in 2019 and Punatshangchhu I in 2016.  The GDP is projected to accelerate to 8.2 percent in the 2017 fiscal year (FY), mainly on stepped-up hydropower plant construction and the completion of projects included in the five-year plan. In FY 2016, the GDP grew by 6.4 percent, slightly higher than the 6.1 percent a year earlier.

In the last meet-the-press session, Prime minister Tshering Tobgay said the government would work toward minimizing the impact of the delay in completion of the hydropower projects. The failure to complete the projects on time, according to the prime minister, has already cost the government about Nu 19 billion (B) in the 11th plan.

The prime minister said the Mangdechhu project would be commissioned by 2018. “The delay has affected our revenue. But the government will work hard to minimise the impact,” he said.

Finance Minister Namgay Dorji said the delay in the hydropower projects were caused by geological glitches. He said the economy has improved over the last few years. “We have very good relations with India and exercise duty refunds from India have been increasing,” the finance minister said.

According to the report, the demonetization measure in India in November 2016 is expected to suppress border trade somewhat through the third quarter of FY 2017. But the report adds it is not seen to have a long-term impact as most of Bhutan’s trade with India is settled through bank drafts and checks rather than cash.

The growth of the industry sector is expected to strengthen in FY 2017 as electricity output increases with the return of normal weather. The sector’s growth will also be accelerated as works on large hydropower projects continue and infrastructure damaged by last year’s torrential rains is rehabilitated. The sector’s growth is expected to surge in FY 2018 on much higher electricity output and exports following the completion of the Mangdechhu hydropower plant.

The growth of the services industry in FY 2017 and FY 2018 is projected to improve faster and as recovery in tourism is expected as worries over earthquakes in the Himalayas fade. According to the ADB report, the government plans to slow its expenditure growth sharply to 4.4 percent in FY 2017, as capital expenditure will drop with the completion of five-year plan activities in the next two years. A year earlier, expenditure growth was over 36 percent.

Notably, a much larger minimum personal income tax exemption is expected to deduct 2.5 percent from projected tax revenues, but it is budgeted to be offset by higher receipts from mineral royalties and rent.

Reform of the minimum lending rate, announced by the Royal Monetary Authority in July 2016, prompted banks to slash loan interest rates and is expected to boost credit expansion temporarily before equilibrium returns in the medium term. Rules and regulations for private moneylenders, adopted in December 2016, will bring this business under the formal financial sector, supplementing other strong measures to control credit after excessive lending in FY 2011 put pressure on the balance of payments.

MB Subba