Creating a sustainable economy

For Bhutan, 2008 was a year of momentous historical significance when the country transitioned into a constitutional monarchy with new democratic institutions. This provides the backdrop for the implementation of the development agenda. Upcoming hydropower projects, promotion of Bhutan as an educational, ICT and tourism hub are being given priority in the economic development policy of the government. Financing for the 10th Plan, which aims to double development spending with a focus on poverty reduction through industrial development, balanced regional growth and infrastructure investment has been tied up. Real GDP growth in 2007-08 was 21.4 per cent reflecting the doubling of hydro power generation capacity with the coming on stream of the Tala hydro project. GDP growth rate is expected to return to a trend level of 5.6 per cent in 2008-09. Regional integration through enhanced trade relationships with neighbouring countries, especially India and Bangladesh are helping growth and diversification. On the external sector, while reserves of convertible currency are comfortable, rupee reserves require careful management to meet the needs for imports.

The economic growth of Bhutan is attributed largely to substantial contribution coming from electricity, construction, tourism related industries and communication sectors. The public sector continues to lead the economic growth of the country with increasing spending in the socio-economic development activities.

National budget

The economy in fiscal year 2009-10 is projected to grow by around 8 percent and similar trends are projected in the FYs 2010-11 and 2011-12. The share of primary, secondary and tertiary sectors to the GDP on an average is projected to be 14 percent, 46 percent & 36 percent respectively. The economic growth will continue to be significantly driven by electricity and construction. The high growth in these sub-sectors is mainly due to the major socio-infrastructure developments such as the hydropower project constructions. Also, the impact of the global economic crisis is likely to be minimal as the global economies are expected to recover by 2010. However, in the short run, the negative impact of global recession may continue to be felt mostly on the international reserves, trust funds and the tourism industry. Despite these negative externalities, the Bhutanese economy is projected to grow at a healthy pace. 

Inflation started falling from a high of 9.3 percent in the third quarter of 2008, with decreasing global fuel prices and tradable commodities. As such, inflation is projected to go down to around 4 percent in the FY 2009-10 and in the subsequent two FYs. However, with increasing disposable income of the Bhutanese people, the prices of non-tradable goods and services may increase.

In the external sector, the overall balance of payments is projected to remain positive with significant flow of loans and grants despite the negative current account balance. Therefore, the gross international reserves will continue to be built up and sustain around 7 months of imports of total goods and services in the next three fiscal years. This will be within the constitutional requirement of 12 months essential imports. 

One of the main aspects of the Government's fiscal policy is to maintain the fiscal deficit to a sustainable level of the GDP. The fiscal deficit is projected at 3 percent in the FYs 2010-11 and 2011-12. However, for FY 2009-10, the fiscal deficit is currently projected at about 6.91 percent. Domestic revenue is projected to increase at a steady pace with almost 50 percent of the total revenue coming from CIT and dividends from hydro-power projects and the corporate sector. The total external grants for FYs 2009-10, 2010-11 and 2011-12 have been projected based on known commitments and disbursement trends.

Sources:
(1) International Monetary Fund, World Bank, Asian Development Bank
(2)  Government of Bhutan
(3) Royal Monetary Authority
(4) www.kuenselonline.com
(5) Statement by Mr. Duvvuri Subbarao, Alternate Governor, (On behalf of Mr. Palaniappan Chidambaram, Home Minister of India & on behalf of Bangladesh, Bhutan, India, Sri Lanka) at International Monetary and Financial Committee Nineteenth Meeting on April 25, 2009).
(6) National Budget, Ministry of Finance, Government of Bhutan