Thukten Zangpo

Rising food prices driven by cost of transportation, a growing trade deficit, burgeoning debt, and decreasing domestic revenue. These are not good signs for any country recovering from the Covid-19 pandemic. Is the country’s economy at risk?

Bhutanese economy has been recovering well from the pandemic after the economy contracted to 10.1 percent in 2020. The finance ministry in its budget report for the fiscal year 2022-23, had projected the real gross domestic product (GDP) to grow at 3.7 percent in 2021 and 4.5 percent in 2022 respectively. In 2023, the economic growth is projected at 3.88 percent.

However, economists say that the country’s short-term economic outlook is concerning. The World Bank had also recently signaled that many countries could face stagflation, a slow growth combined with high inflation.


Bhutan’s consumer price inflation accelerated from 5.6 percent in 2020 to 7.4 percent in 2021, which was above the Royal Monetary Authority’s (RMA) upper tolerance of 5 percent. The inflation eased to 5.79 percent as of April this year.

Inflation hurts the fixed-income groups, workers in informal sectors, small businesses, and the poor the most. An economist said that combined with higher unemployment, rising inflation will push more people below the poverty line, household debt will also rise, and spending cuts will follow.

Food prices contributed to about 60 percent to the overall inflation and non-food contributed to 40 percent in 2021.

The finance ministry in the budget report stated that the rising cost of fuel will have a ripple effect that can cause a significant trade shock. Similarly, the rising cost of goods is likely to affect manufacturing competitiveness and impact investment prospects. It could also paralyse the economy because it erodes the purchasing power of Ngultrum making the cost of goods expensive for consumers.

However, the ministry projected inflation to fall to 5.2 percent in 2022 and 3.5 percent in 2023 at the pre-pandemic level if supply-side disruptions dissipate and global food and energy prices stabilise.

Fiscal deficit

Bhutan’s fiscal deficit has been widening over the years. The fiscal deficit of Nu 2.734B (1.5 percent of GDP) in the fiscal year 2018-19 was projected to grow at an alarming rate to Nu 17.498B (9.3 percent of GDP) in this fiscal year.

With dwindling domestic revenue, the deficit is projected to further widen at an all-time high of Nu 22.882 billion (B), which is 11.25 percent of GDP in the fiscal year 2022-23 of the total expenditure estimated at Nu 74.807B.

According to the finance ministry, the deficit would be financed through net external concessional borrowing of Nu 0.27B and net domestic borrowing (treasury bills and long-term government bonds) of Nu 20.356B.

The deficit was observed because of the shortfalls in the domestic revenue collection and increased spending requirements related to the pandemic. Bhutan adopted tax cuts during the crisis and forgone revenue of Nu 5.01B in the income year 2020. Tax to GDP ratio was 11.7 percent in the fiscal year 2020-21, a decrease of 1 percent as compared to the previous fiscal year.

According to the budget report, the ministry targets to contain the fiscal deficit below 5 percent of the GDP during fiscal year 2022-23.

Trade deficit

Rising prices of goods and increasing imports is already widening the country’s current account deficit (CAD). The CAD was projected to widen from 12.4 percent of GDP in the fiscal year 2020-21 to 23.6 percent of GDP (Nu 44.4B) in this fiscal year.

Moreover, the trade deficit which is the largest component of CAD was estimated to widen from 7.1 percent in the fiscal year 2020-21 to 17.8 percent of GDP in the fiscal year 2021-22.  This was attributed to a decline in energy generation and lower hydro exports and a significant increase in imports. However, figures with the ministry show that both exports and imports including electricity increased by 18.9 percent and 35.8 percent respectively in 2021 compared to 2020.

The country’s export was little more than half the import value at Nu 58.25B. Import in 2021 was worth Nu 90.323B.

As the economic activities picked up imports from India surged to Nu 71.236B in 2021 compared to Nu 51.379B in 2020. Imports from third countries also saw a surge. Bhutan imported goods worth Nu 18.99B in 2021. It was Nu 15.26B in 2020.

As an import-dependent economy with a pegged exchange rate, any depreciation of the Indian rupee versus the US dollar raises the cost of imports from third countries. However, the pegged exchange arrangement is in favour of Bhutan as more than 80 percent of its trade is with India.

The ministry projected that the CAD to narrow as trade balance improves and electricity exports increase with the commissioning of the new hydro-projects- Puna-I, Puna-II, and Nikachu in the medium term.

Foreign currency reserves

Widening current account deficits eats into the foreign currency reserves. The gross international reserves is estimated to deplete to USD 1.33B this fiscal year from USD 1.56B from the previous fiscal year.

Of the total, convertible currency (CC) reserves are estimated at USD 1.157B and INR reserves at INR 13.076B (USD 171.6M). The total reserves would be sufficient to finance 22 months of essential imports.

“It is on a declining trend as no new investments generating foreign exchange earnings have been identified. The recent trend indicates that there has been a significant increase in imports without many corresponding inflows, which could possibly risk the pegged exchange rate regime,” the ministry stated.

Tourism and export was either shut down or was happening on a minute scale, which had a significant impact on the reserves of a country. Foreign direct investment (FDI) also did not see much growth.

According to the ministry, the CC reserves inflows are limited to external grants, loans, and hydropower receipts making it difficult to meet the balance of payment obligations and straining the foreign currency reserves.

Prime minister Dr Lotay Tshering during a question-answer session on June 21 said that if the country faces a foreign reserves crisis, the government has to either reduce or stop imports. He added that Druk Holding and Investments is coming up with plans to revamp two to three existing FDI projects to earn foreign reserves.

External Debt

As of March, this year, the country’s debt was recorded at Nu 247.68B (130.9 percent of GDP). About 89.7 percent of the debt was external debt. Major share of the debt was from the six hydropower projects in the country. At Nu 162.197B, hydro-debt contributed to 73 percent of the total external debt.

Non-hydro debt stood at Nu 59.91B, constituting 27 percent of total external debt.

INR denominated debt accounted for 69.7 percent of total external debt at Nu 154.9B and the convertible currency debt was USD 884.191M which was equivalent to Nu 67.20B.

Of the total debt, 91.2 percent of the hydro-debt was denominated in Indian rupee.

Director of Macroeconomics, Research and Statistics of the RMA, Gopal Giri, during the Bhutan Democracy Forum last month said that if the pegged exchange regime is distorted, Bhutan might have to pay more for hydropower debt. He added that although the Indian rupee is depreciating currently, the exchange rate is not volatile as India is a big economy.

The ministry projected the external debt to increase from Nu 229.202B on June 30, 2022, to Nu 239.814B by June 2023, an increase of 4.6 percent.

The growth was projected mainly due to hydro loan disbursements, projected at Nu 11.737B for the fiscal year 2022-23, and Nu 5.470B of budgetary loan disbursements from multilateral development banks and Japan International Cooperation Agency.

The external debt-to-GDP is projected to reach 117.9 percent in the fiscal year 2022-23, a steep jump in the following fiscal year 2023-24 hitting 129.1 percent.

The projected hike in fiscal year 2023-24 is mainly contributed by the capitalisation of interest during construction of Punatsangchhu-II estimated at Nu 42.333B with the expected commissioning in June 2023.

However, delays in hydropower projects could pose risks and could raise the country’s debt. The cost of the two major ongoing hydropower projects in the country, 1,200 megawatts (MW) Punatsangchhu-I (P-I) and 1,020MW Punatsangchhu-II escalated to Nu 93.75B from Nu 35B and 89.77B from Nu 37B estimated in 2009 respectively.