Economy: Having realised economic growth of 7.6 percent in the past three decades, Bhutan is the one of the most successful countries, said senior economist and resident representative of the World Bank, Yoichiro Ishihara, at a panel discussion following the Launch of economic early warning system yesterday.

Notwithstanding the fact that Bhutan runs the highest current account deficit in the world, which is around 30 percent of the GDP, the country is confronted with a structural imbalance. This is because the economic growth is being driven by hydropower and the public sector.

While the current account deficit is on account of hydropower loans, which is supposed to be self-liquidating, the resident representative said it is critical to monitor the hydropower sector if the case is so.

“Hydropower not only impacts the economic growth but also for the sustainability of the country’s current account,” he said.

A major chunk of country’s debt is also concentrated in the hydropower sector.

Sonam Tenzin, the chief of the macroeconomic surveillance division under the new department of macroeconomic affairs of the finance ministry, said the country’s current account deficit is formed because of the accelerated hydropower construction financed through loans and grants.

The deficit, he said, is projected to fall drastically after the commissioning of three mega hydropower projects. He, however, added that the country has sources to finance the current account deficit.

Pushpalal Chhetri, former deputy governor, said cost escalations in the hydropower sector could result in increased electricity tariff. “If a unit of electricity cost Nu 6 a unit, where is the market?” he asked.

The director for regional cooperation and integration division of the Asian Development Bank, Cyn-Yong Park, said the country’s largest export commodity, electricity, is heavily dependent on India. The export of electricity, she suggested, should explore its market in the region to avoid structural vulnerabilities.

As for debt, Sonam Tenzin said the ministry has segregated the hydro and non-hydro debt. Non-hydro debt. He said non-hydro debt has been brought down by six percent.


The answer, according to the panel of experts, is in economic diversification.

Cyn-Yong Park said Bhutan has great potential in tourism, wood products and textile, among others. “There are many things, the industrial base can explore and expand,” she said. “Bhutan really needs to develop its manufacturing base and produce essentials for domestic consumption.”

Pushpalal chhetri however pointed out that there is hardly any growth in the manufacturing sector. “Twenty years ago there were only 17 companies listed on the stock exchange and today there are only around 20,” he added.

The excise duty of about 15-20 percent on the import of raw materials and the annual increase in electricity tariff, for instance, is making the local industries incompetent, he said.

He said that there is no commercial financing to boost the rural economy and most of the domestic credit is concentrated in sectors that lead to consumption.

The resident representative of the World Bank also said if the goal is to provide employment that leads to inclusive growth, the hydropower and mining sectors  are not going to deliver. “It is internationally accepted that these sectors create little employment.”

The potential, according to him, lies in tourism, ICT and manufacturing. ICT, he said is the largest job creator. He added that Bhutan probably needs to connect the dots from different sectors to realise it’s full potential. “This is not happening.”

The country may have a small economic base, but according to Yoichiro Ishihara there is an advantage in being small. Lot of complicated systems could be made easier, he said.

For instance, countries resort to economic stimulus plans when the economy is not doing well. If the supplementary budget for the stimulus package is to go through the government to Cabinet and then to the Parliament, it could easily consume half a year.

Panelists from the ministry said that the government recognised the challenges and is preparing to face them.

The revised economic development policy, Sonam Tenzin said, is geared towards diversification of the economic base, including the industrial growth and mushrooming of cottage and small industries.

Industrial growth in the coming years is projected to increase from 6 to 10 percent. The narrow economic base, he said, complicates the policy formulation.

While diversification seems possible, lack of capital has been viewed as a major constraint.

Pushpalal chhetri said it is possible to source the required capital internally, for internal use and that can be repaid internally by developing the bond market.

In absence of a bond market, he said that the only source of capital is the credit from financial institutions, exposing them to asset-liability mismatch. “If institutions invest in long-term bonds, it not only will aid in credit creation but also develop the capital market.”

The public accounts department’s director, Tshering Dorji, acknowledged that the only instrument of domestic financing apart from the credit is the government treasury bills.

He added that the ultimate aim is to create a vibrant domestic debt market for domestic use. To this effect, he said the government has approved the capital market development roadmap.

Tshering Dorji