This 2014 Article IV Consultation highlights that the GDP growth in Bhutan has slowed from about 10 percent in FY2011 (July 1–June 30) to 5 percent in FY2013. Slower growth reflects policy efforts to contain overheating pressures in the form of restrictions on credit for construction and vehicle. Inflation has remained elevated, tracking closely that of India (Bhutan’s main trading partner). Social development indicators have improved steadily, and Bhutan is on track or has achieved most of its Millennium Development Goals. Growth is projected to recover to 6½ percent in FY2014, driven mainly by a pick-up in hydropower-related construction activities and domestic services.
1. This supplement to the staff report summarizes the main developments since the staff report was issued on June 2, 2014. Staff projections and the thrust of the staff appraisal remain unchanged.
Credit growth increased slightly to 8.3 percent (year on year) in March 2014 from 7.5 percent in December 2013. Private sector credit grew at an average annual rate of 30 percent during 2002–11. However, administrative measures to slow credit growth had resulted in a deceleration of private sector credit growth before its recent slight increase (March 2014).
International reserves increased from US$ 931 million in December 2013 to US$ 965 million in March 2014. Reserve cover remains at over 10 months of imports, suggesting an overall adequate level of reserves.
Inflation in Bhutan is projected to remain elevated given the recent reading of inflation in India (CPI inflation rose by 8.3 percent in May in India) and the findings of staff analysis that inflation in Bhutan is closely related to Indian inflation (see Box 2 in the Bhutan staff report).
Indian Prime Minister Narendra Modi reaffirmed India’s commitment to extensive development cooperation with Bhutan (both hydropower-related and non-hydro aid) during his June 14–15 visit and committed to further enhancing the economic ties between the two countries (via expanding bilateral trade, for example).