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© 2007 International Monetary Fund

October 2007

IMF Country Report No. 07/350

Bhutan: 2007 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bhutan.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with Bhutan, the following documents have been released and are included in this package:

  • The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 31, 2007, with the officials of Bhutan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 20, 2007. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A staff supplement on the joint IMF/World Bank debt sustainability analysis.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 5, 2007 discussion of the staff report that concluded the Article IV consultation.

  • A statement by the Executive Director for Bhutan.

The document listed below has been or will be separately released.

  • Selected Issues Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

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Price: $18.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2007 Article IV Consultation

Prepared by the Staff Representatives for the 2007 Consultation with Bhutan

Approved by Kalpana Kochhar and Matthew Fisher

September 20, 2007

  • The 2007 Article IV consultation discussions with Bhutan were held in Thimphu during July 19–31, 2007. The staff team consisted of Mr. Kalra (Head), Ms. Oura, and Ms. Topalova (all APD). Mr. Mohanty, Senior Advisor to Executive Director, attended meetings.

  • The mission met with Prime Minister Wangchuk, Finance Minister Norbu, Royal Monetary Authority Managing Director Tenzin, other senior officials, and private sector and donor representatives.

  • Bhutan is on a 24–month consultation cycle. In concluding the 2005 consultation discussions on July 11, 2005, Executive Directors noted that political stability and prudent macroeconomic policies have contributed to robust economic growth and improvement in social indicators. Directors considered Bhutan’s medium-term growth prospects to be favorable in light of its policy record, further potential for growth in hydropower and related sectors, and strong support of development partners. Directors underscored the need to maintain fiscal sustainability by limiting domestic financing and mobilizing external aid, improve budget planning, and strengthen coordination with donors. Directors noted that challenges remain to develop the private sector, to generate jobs and reduce poverty. Directors encouraged the authorities to streamline the regulatory regime; liberalize trade and FDI; align the education system to market needs; and invest in infrastructure.

  • Bhutan continues to avail of transitional arrangements under Article XIV, Section 2. Bhutan also maintains an exchange restriction subject to Fund approval under Article VIII, Section 2(a).


  • Executive Summary

  • I. Background and Macroeconomic Setting

  • II. Economic Developments in 2005/06–2006/07

  • III. Outlook, Risks, and Challenges

  • IV. Policy Discussions

    • A. Monetary, Reserves, and Exchange Rate Management

    • B. Risks to Financial Sector Soundness

    • C. Fiscal Sustainability

    • D. Structural Reforms for Sustained Growth and Poverty Alleviation

  • V. Data Issues

  • VI. Staff Appraisal

  • Boxes

  • 1. Poverty in Bhutan

  • 2. Stress Tests of Banking Sector Soundness

  • Figure

  • 1. Medium-Term Prospects

  • Tables

  • 1. Selected Economic and Financial Indicators, 2003/04–2007/08

  • 2. Government Budget Summary, 2003/04–2007/08

  • 3. Balance of Payments, 2004/05–2012/13

  • 4. Monetary Survey, 2002/03–2006/07

  • 5. Medium-Term Macroeconomic Framework, 2004/05–2012/13

  • 6. Millennium Development Goals

Executive Summary

Political stability and prudent economic management continue to contribute to a significant rise in living standards and development indicators in Bhutan. Significant political changes are in the offing, but the authorities are taking steps to ensure the continuation of sound policies. Bhutan’s economic prospects are bright. Construction of two hydropower projects will help sustain real GDP growth over the medium term. With the exchange rate peg to the Indian rupee, inflation is expected to be in line with price developments in India. The overall balance of payments is projected to be in surplus and would help maintain adequate international reserves.

The authorities are aware of the risks and challenges going forward. Near-term risks relate mainly to a (temporary) decline in official rupee reserves to critical levels. In addition, there is a potential for “Dutch disease” type overheating and exchange rate appreciation with full commissioning of Tala. Other risks and challenges relate to continued rapid credit growth and vulnerabilities in the banks’ balance sheets and concerns about debt sustainability, as power projects in the pipeline begin. With a rapidly growing labor force and limited public sector absorption capacity, policy measures are required to foster private sector job creation.

Key Policy Recommendations

The Royal Monetary Authority (RMA) needs to remain watchful of excess liquidity, credit growth and financial sector soundness. Mopping up excess liquidity requires stepped up issuance of RMA bills and an increase in the CRR ratio. There is also a need to limit financial institutions’ balance sheet exposures to factors that pose a potential risk of higher NPLs, by developing markets in financial instruments to manage liquidity in the short run and provide alternative investment vehicles for financial institutions over the medium term. The RMA needs to enhance its financial sector supervision and build capacity in monetary and foreign exchange reserve management.

The exchange rate peg to the Indian rupee and the level of the peg remain appropriate. Close trade and other links with India generate significant benefits for the Bhutanese economy and help to anchor inflation expectations. Should they arise, some fiscal tightening would help alleviate real exchange rate appreciation pressures, when Tala comes on stream. Competitiveness can be enhanced by raising private sector efficiency and lowering costs.

Fiscal sustainability requires limiting domestically financed deficits and mobilizing external aid. While the public debt-to-GDP ratio moves along the power sector cycles, maintaining the debt ratio on a downward trajectory requires that domestically financed deficits be limited by mobilizing external aid and planning expenditures in a medium-term framework. Broadening the tax base and better administration can increase revenue.

To foster private sector growth and generate employment opportunities, policy measures are required. The main areas are aligning the education system to market needs, further streamlining the regulatory regime, liberalizing the trade regime, implementing financial sector reforms, and investing in infrastructure to lower nonlabor costs. In the financial sector, the revised RMA Act, Financial Institutions Act, and Foreign Exchange Regulations should be adopted early in 2008.

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Staff Report for the 2007 Article IV Consultation—Informational Annex

Prepared by the Asia and Pacific Department

September 20, 2007


  • I. Fund Relations

  • II. Relations with the World Bank Group

  • III. Relations with the Asian Development Bank.

  • IV. Statistical Issues

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Joint IMF/World Bank Debt Sustainability Analysis 2007 1

Prepared by the staffs of the International Monetary Fund and the International Development Association

Approved by Matthew Fisher and Kalpana Kochhar (IMF) and Vikram Nehru and Sadiq Ahmed (IDA)

September 20, 2007

External and public debt dynamics are assessed using the Low-Income Country Debt Sustainability Analysis (LIC-DSA) framework. Debt ratios remain elevated in the coming years due to additional hydropower projects. Notwithstanding the breach of some LIC-DSA indicative thresholds, staffs’ assessment is that external debt dynamics are subject to a moderate risk of distress. This assessment is made on the basis of the near absence of commercial risk from Bhutan’s major energy projects and the high level of its foreign exchange reserves in relation to external indebtedness.

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Public Information Notice (PIN) No. 07/129


October 12, 2007

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On October 5, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bhutan.1

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October 5, 2007