Thukten Zangpo 

The World Bank (WB) predicts that Bhutan’s economy will rebound to 4.9 percent growth in the fiscal year 2023-24. 

This uptick is attributed to the stronger performance of the service sector. 

In comparison, growth was anticipated to be 4.6 percent in the preceding fiscal year, 2022-23.

This is according to the Bank’s latest report, “Bhutan Development Update”, released yesterday. 

The Bank noted that growth is expected particularly in tourism-related services and the industrial sector, driven by a gradual rise in mining and manufacturing activities, particularly in base metals.

Furthermore, the Bank added that the implementation of new incentives aimed at attracting longer-staying international tourists is expected to bolster the tourism sector in the fiscal year 2023-24.  However, it projects that tourist arrivals will likely continue to fall short of the levels seen before the pandemic.

On the demand side, growth will receive support from services exports and consumption, driven by increased government expenditure.

Looking ahead in the medium term, robust growth is anticipated in exports, construction, and the services sectors. This growth will be driven by the commissioning of the Puna-II hydropower plant, which is set to add 1,020 megawatts (MW) to Bhutan’s existing hydropower generation capacity of 2,300 MW.

The Bank also said that the timber woods and wood product exports, along with activities from the carbon markets bieng established, are expected to provide additional resources for growth. 

Furthermore, the injection of a Nu 15 billion economic stimulus package into the economy will support private sector growth, along with the promotion of special economic zones or autonomous areas to attract foreign direct investments, aligned with the vision of the Gelephu Mindfulness City.

Inflation is projected to remain elevated at 4.9 percent in fiscal year 2023-24 due to extended global supply disruptions resulting from Russia’s invasion of Ukraine and tensions in the Middle East. 

The inflation is expected to ease at 4.1 percent in the next fiscal year.

“To maintain a strong and inclusive growth, Bhutan can do more to enable the business environment to attract foreign direct investments and promote the private sector to create more jobs that appeal to the aspirations of its citizens,” Abdoulaye Seck, WB’s Country Director for Bangladesh and Bhutan, said. 

Further, he added that it would be equally important for the government to timely address the increasing stress on service delivery because of human resources challenges. 

However, the Bank warned against the downside risks to the economy.

The Bank said that the risks include delayed fiscal consolidation, vulnerabilities in the financial sector, volatile international commodity prices, and delays in hydropower projects. 

The country’s fiscal deficit is expected to widen to five percent of gross domestic product in fiscal year 2023-24 from 4.7 percent in fiscal year 2022-23 because of decline in revenues and a major civil servants’ salary increase. 

There has been a significant decline in international reserves, but have begun to stabilise as the current account deficit showed signs of narrowing in the first quarter of the fiscal year 2023-24, following a significant expansion in fiscal year 2022-23, the Bank said.

Bhutan’s revenue remains largely driven by the hydropower sector, which contributes significantly to both tax and non-tax revenue collection. However, the contribution from direct taxes without the hydropower sector remained stagnant, it added. 

“Greater contribution from direct taxes beyond the hydropower sector, coupled with a more effective tax administration system, could bolster Bhutan’s ability to generate increased revenues essential for its development,” Hoon Sahib Soh, World Bank’s Practice Manager for Macroeconomics, Trade and Investment for South Asia Region, said. 

The Bank also said that the state enterprises in Bhutan contribute significantly to budget revenues and create jobs but suffer from profitability and performance challenges. 

Although Bhutan enhanced its legal and regulatory framework for state enterprise management, key policy gaps persist, including ownership and dividend policies, it added.

WB’s Resident Representative for Bhutan, Adama Coulibaly, said, “Furthermore improvements in managing investments, corporate governance and financial reporting, can help improve performance of state enterprises and reduce fiscal risks.”