… with major salary raise and tourism recovery

Thukten Zangpo   

The World Bank (WB) estimated the economic growth for Bhutan at 4 percent for fiscal year 2023-24, stronger than its previous April’s forecast of 3.1 percent in its October update report released yesterday.

According to the WB, the economy was estimated to have grown by 4.6 percent in fiscal year 2022-23 with the reopening of borders and hydropower exports rebounded.

The growth is expected to slow to 4 percent in the next fiscal year 2023-24 but stronger than earlier projection partly because of a major salary increase for government workers, according to the Bank. It also added that the recovery in tourism, which was delayed because of an increase in tourism levy in September 2022, has been partially relaxed.

However, private investment growth is expected to remain weak as growth is supported by private and public consumption, the public investment is contributing negatively to growth because of a decline in capital spending.

At the same time, the credit supply is restrained by a moratorium on new housing and hotel construction loans and high non-performing loans in the banking sector.

“In Bhutan, the average growth rate of investment in the past five years has been negative or near zero with private investment growth particularly weak in Bhutan,” the report stated.

The Bank urged that reducing subsidies or budgetary support to state-owned enterprises could allow for greater private-sector participation while also increasing fiscal space.

The Asian Development Bank (ADB), in its September update, projected a growth rate of 4.3 percent this year, down from an earlier estimate of 4.6 percent. This was mainly because of adverse weather conditions, particularly erratic monsoon rains which negatively impacted crop production and shortfall in hydropower production.

The ADB has projected higher growth of 4.4 percent next year because of opening of new hydropower plants—Nikachhu by the end of 2023 and Punatshangchhu-II by end 2024.

The International Monetary Fund’s (IMF) October World Economic Outlook, “Navigating Global Divergences,” projected Bhutan’s GDP growth at 5.3 percent this year, 3 percent in 2024 and 3.6 percent in 2028.

The World Bank warned of the high fiscal deficits and current account deficit because of pandemic-related relief measures and weak public revenue performance.

According to the Bank, the fiscal deficit narrowed from 7.7 percent of gross domestic product (GDP) in fiscal year 2021-22 to 5.1 percent in fiscal year 2022-23 due to higher domestic revenue and lower capital spending. The fiscal deficit is expected to increase to 6.1 percent of GDP in fiscal year 2023-24 because of an increase in current spending and a major salary hike to address significant staff attritions.

At the same time, the current account deficit (CAD) widened to 27.8 percent in fiscal year 2022-23 due to imports of IT equipment and a slow tourism recovery. The Bank stated that the gross international reserves are expected to decline further from USD 833 million in June last year to USD 533 million in June this year, equivalent to 4.3 months of fiscal year 2022-23 imports.

The CAD is projected to decline to 17 percent of GDP in fiscal year 2023-24 because of a reduction in IT equipment imports supported by an increase  in tourism and electricity exports. International reserves are expected to increase to 6.2 months of import coverage in fiscal year 2023-24.

The World Bank also stated that high unemployment rates since Covid-19 pandemic, particularly among the youths recorded 29 percent last year, contributed to a significant increase in emigration and loss of human capital from the country.