Abstract
IMF Country Report No. 22/146
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IMF Country Report No. 22/146
BHUTAN
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR BHUTAN
May 2022
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 2022 Article IV consultation with Bhutan, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its May 13, 2022 consideration of the staff report that concluded the Article IV consultation with Bhutan.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 13, 2022, following discussions that ended on February 18, 2022, 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 April 26, 2022.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staff[s] of the IMF and the World Bank.
A Statement by the Executive Director for Bhutan.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2022 International Monetary Fund
Press Release
PR22/168
IMF Executive Board Concludes 2022 Article IV Consultation with Bhutan
FOR IMMEDIATE RELEASE
Washington, DC- May 24, 2022: On May 13, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Bhutan.
Prior to the pandemic, Bhutan had made significant strides in improving per capita income and reducing poverty, qualifying for its graduation from the Least Developed Country (LDC) status in 2023. The pandemic has had a substantial impact on the economy. Real GDP contracted for two fiscal years, with contact-intensive and externally oriented sectors most affected. The wide-ranging policy responses, aided by Bhutan’s impressive vaccination campaign, helped mitigate adverse impact on lives and livelihoods. The responses included the deployment of the National Resilience Fund, the Economic Contingency Plan, and a series of fiscal, monetary, financial, and labor market measures.
While the pandemic and the war in Ukraine are weighing on the near-term outlook, medium term growth is expected to be driven by a recovery in services, manufacturing, and hydro power. Growth is projected at 4.4 percent in FY2021/22, with the negative impacts from the Omicron outbreak and higher commodity prices partly offset by higher electricity exports, ongoing policy support, and base effects. Inflation is projected to remain elevated in FY2021/22, owing also to higher commodity prices and supply disruptions. Over the medium term, hydropower generation capacity is expected to double, supporting growth, the current account balance, and the fiscal position. Inflation is projected to remain in line with that in India, Bhutan’s key trading partner, given the ngultrum’s peg to the rupee. The fiscal deficit is expected to moderate as pandemic-related measures are gradually phased out and revenue reforms deepen. The current account deficit and reserve coverage are expected to improve from declining hydro power-related imports and rising hydropower exports.
Uncertainty around the economic outlook is elevated, with the balance of risks tilted to the downside. External risks include a sharper-than-expected global slowdown and/or a slowdown in India, including from future pandemic waves, an intensification of geopolitical tensions, and a slow recovery in tourism. Domestic risks stem from pandemic-related uncertainties, elevated financial sector strains amid limited fiscal space and delays in hydro projects, which would affect growth, external buffers, and debt dynamics. That said, recent increases in hydropower production and remittances have supported reserves.
Executive Board Assessment2
Executive Directors commended the authorities’ response to the pandemic, which included Bhutan’s record setting vaccination campaign, and wide ranging policy measures. These measures have helped mitigate adverse impact of the pandemic on lives and livelihoods.
Directors agreed that fiscal policy has appropriately supported the pandemic and recovery efforts. A gradual medium-term consolidation, underpinned by revenue mobilization, would be important amid higher debt levels and limited fiscal space. They encouraged the authorities to further develop a domestic bond market, which would support stable and longerterm funding, and increase supply of risk free assets. Directors welcomed the authorities’ efforts in broadening the revenue base, including the planned introduction of the Goods and Services Tax.
Directors noted that monetary policy has been appropriately accommodative but should be gradually normalized as the recovery takes hold, amid rising inflationary pressures. They welcomed efforts by the Royal Monetary Authority to modernize the monetary policy framework by introducing a Domestic Liquidity Management Framework. Further reforms, including in the liquidity management framework and digitalization, would support market development.
Directors highlighted the need to address risks in the banking sector while supporting the economic recovery. They agreed that a well-communicated plan for withdrawing broad based policy support would be warranted, as activities gradually normalize. Directors welcomed the authorities’ progress in implementing a risk based supervisory framework, and emphasized the importance of monitoring cash flows, assessing corporate viability, and a steadfast implementation of the new NPL resolution framework.
Directors agreed that the exchange rate peg to the Indian rupee has served Bhutan well and remains an appropriate nominal anchor. Directors welcomed the recent steps to remove some foreign exchange restrictions and encouraged elimination of the remaining restrictions as soon as macroeconomic conditions allow.
Directors acknowledged that the post-pandemic recovery offers an opportunity to lay the groundwork fora shift towards greater diversification and a knowledge-based economy. They agreed that continued improvements in physical and digital infrastructure should help support Bhutan’s development goals and economic transformation and further progress with improving access to finance remains crucial. Directors welcomed the authorities’ plan for climate change adoption and further greening of energy sources.
Bhutan: Selected Economic and Financial Indicators, 2017–23
The expenditure for FY2020/21 and FY2021/22 includes an estimated amount for income support provided to individuals and loan interest payment support to borrowers financed by the National Resilience Fund.
Public and publicly guaranteed debt, including loans for hydropower projects.
Bhutan: Selected Economic and Financial Indicators, 2017–23
| 2017/18 | 2018/19 | 2019/20 | 2020/21 | 2021/22 | 2022/23 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Proj. | Proj. | ||||||||||
| (In percent of GDP, unless otherwise indicated) | ||||||||||||
| National Accounts | ||||||||||||
| Mominal GDP (in millions of nqultrum) | 163,456 | 172,951 | 175,067 | 176,671 | 196,161 | 217,004 | ||||||
| Real GDP growth (percent change) | 3.8 | 4.4 | -2.4 | -3.7 | 4.4 | 4.5 | ||||||
| Prices | ||||||||||||
| Consumer Prices(EoP; percent change) | 2.5 | 2.7 | 4.5 | 9.0 | 6.5 | 5.1 | ||||||
| Consumer Prices(avg; percent change) | 3.7 | 2.8 | 4.2 | 8.2 | 7.9 | 5.4 | ||||||
| General government accounts | ||||||||||||
| Total revenue and grants | 31.9 | 24.3 | 31.2 | 33.8 | 28.7 | 24.1 | ||||||
| Domestic Revenue | 22.6 | 20.1 | 20.7 | 20.3 | 17.5 | 19.8 | ||||||
| Tax revenue | 16.6 | 15.7 | 13.0 | 11.7 | 11.8 | 13.8 | ||||||
| Non-tax revenue | 6.0 | 4.4 | 7.7 | 8.6 | 5.7 | 6.0 | ||||||
| Foreign Grants | 9.1 | 6.1 | 9.4 | 8.4 | 10.8 | 4.3 | ||||||
| Total expenditure 1/ | 33.5 | 25.9 | 33.1 | 40.1 | 38.8 | 31.7 | ||||||
| Current expenditure | 16.8 | 16.1 | 21.7 | 24.6 | 20.7 | 17.8 | ||||||
| Capital expenditure | 17.6 | 9.4 | 12.6 | 15.6 | 18.2 | 13.9 | ||||||
| Primary expenditure1/ | 33.1 | 24.5 | 33.8 | 39.2 | 37.5 | 30.1 | ||||||
| Primary balance | -0.3 | -0.7 | -1.5 | -5.3 | -8.8 | -6.0 | ||||||
| Fiscal balance | -1.6 | -1.6 | -1.9 | -6.3 | -10.2 | -7.7 | ||||||
| Interest | 1.3 | 0.9 | 0.5 | 1.1 | 1.4 | 1.6 | ||||||
| General government debt 2/ | 113 | 106 | 131 | 135 | 133 | 131 | ||||||
| Domestic | 5 | 3 | 9 | 10 | 6 | 6 | ||||||
| External | 108 | 104 | 122 | 125 | 127 | 125 | ||||||
| Monetary sector | ||||||||||||
| Broad money (M2) growth (percent change) | 10.4 | 5.6 | 19.3 | 24.4 | 8.8 | 0.6 | ||||||
| Private Credit to GDP ratio | 53.2 | 60.6 | 67.9 | 71.6 | 69.9 | 71.0 | ||||||
| Private credit growth (percent change) | 15.7 | 20.5 | 13.3 | 6.5 | 8.3 | 12.5 | ||||||
| Balance of payments | ||||||||||||
| Current account balance | 18.4 | -20.5 | -12.4 | -11.8 | -10.6 | -9.7 | ||||||
| Goods balance | 16.6 | -16.4 | -10.0 | -7.1 | -9.6 | -7.3 | ||||||
| Hydropower exports | 6.8 | 6.4 | 13.0 | 14.8 | 14.4 | 15.9 | ||||||
| Non-hydropower exports | 17.2 | 18.5 | 13.9 | 15.3 | 14.9 | 14.5 | ||||||
| Imports | 40.6 | 41.2 | 36.9 | 37.2 | 39.0 | 37.8 | ||||||
| Services balance | -1.4 | -2.1 | -2.9 | -4.8 | -4.8 | -3.4 | ||||||
| Primary income | -8.4 | -9.0 | -6.6 | -5.7 | -6.4 | -5.1 | ||||||
| Secondary income | 8.1 | 7.0 | 7.1 | 5.9 | 10.3 | 6.1 | ||||||
| Capital account balance | 7.3 | 5.1 | 5.9 | 3.7 | 7.7 | 4.4 | ||||||
| Financial account balance | 17.2 | -14.7 | -21.0 | -21.5 | -14.3 | -11.1 | ||||||
| Net errors and emissions | 19.4 | -0.1 | -2.3 | -13.4 | 0.0 | 0.0 | ||||||
| Overall balance | 25.4 | -0.8 | 12.2 | -3.5 | 11.5 | 5.8 | ||||||
| Gross official reserves (in USD millions) | 1111 | 1345 | 1344 | 1558 | 1844 | 1977 | ||||||
| (In months of goods imports) | 13.1 | 16.0 | 18.1 | 21.0 | 21.4 | 21.8 | ||||||
| (In months of goods and services imports) | 10.7 | 13.1 | 14.7 | 18.2 | 18.7 | 19.3 | ||||||
The expenditure for FY2020/21 and FY2021/22 includes an estimated amount for income support provided to individuals and loan interest payment support to borrowers financed by the National Resilience Fund.
Public and publicly guaranteed debt, including loans for hydropower projects.
Bhutan: Selected Economic and Financial Indicators, 2017–23
| 2017/18 | 2018/19 | 2019/20 | 2020/21 | 2021/22 | 2022/23 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Proj. | Proj. | ||||||||||
| (In percent of GDP, unless otherwise indicated) | ||||||||||||
| National Accounts | ||||||||||||
| Mominal GDP (in millions of nqultrum) | 163,456 | 172,951 | 175,067 | 176,671 | 196,161 | 217,004 | ||||||
| Real GDP growth (percent change) | 3.8 | 4.4 | -2.4 | -3.7 | 4.4 | 4.5 | ||||||
| Prices | ||||||||||||
| Consumer Prices(EoP; percent change) | 2.5 | 2.7 | 4.5 | 9.0 | 6.5 | 5.1 | ||||||
| Consumer Prices(avg; percent change) | 3.7 | 2.8 | 4.2 | 8.2 | 7.9 | 5.4 | ||||||
| General government accounts | ||||||||||||
| Total revenue and grants | 31.9 | 24.3 | 31.2 | 33.8 | 28.7 | 24.1 | ||||||
| Domestic Revenue | 22.6 | 20.1 | 20.7 | 20.3 | 17.5 | 19.8 | ||||||
| Tax revenue | 16.6 | 15.7 | 13.0 | 11.7 | 11.8 | 13.8 | ||||||
| Non-tax revenue | 6.0 | 4.4 | 7.7 | 8.6 | 5.7 | 6.0 | ||||||
| Foreign Grants | 9.1 | 6.1 | 9.4 | 8.4 | 10.8 | 4.3 | ||||||
| Total expenditure 1/ | 33.5 | 25.9 | 33.1 | 40.1 | 38.8 | 31.7 | ||||||
| Current expenditure | 16.8 | 16.1 | 21.7 | 24.6 | 20.7 | 17.8 | ||||||
| Capital expenditure | 17.6 | 9.4 | 12.6 | 15.6 | 18.2 | 13.9 | ||||||
| Primary expenditure1/ | 33.1 | 24.5 | 33.8 | 39.2 | 37.5 | 30.1 | ||||||
| Primary balance | -0.3 | -0.7 | -1.5 | -5.3 | -8.8 | -6.0 | ||||||
| Fiscal balance | -1.6 | -1.6 | -1.9 | -6.3 | -10.2 | -7.7 | ||||||
| Interest | 1.3 | 0.9 | 0.5 | 1.1 | 1.4 | 1.6 | ||||||
| General government debt 2/ | 113 | 106 | 131 | 135 | 133 | 131 | ||||||
| Domestic | 5 | 3 | 9 | 10 | 6 | 6 | ||||||
| External | 108 | 104 | 122 | 125 | 127 | 125 | ||||||
| Monetary sector | ||||||||||||
| Broad money (M2) growth (percent change) | 10.4 | 5.6 | 19.3 | 24.4 | 8.8 | 0.6 | ||||||
| Private Credit to GDP ratio | 53.2 | 60.6 | 67.9 | 71.6 | 69.9 | 71.0 | ||||||
| Private credit growth (percent change) | 15.7 | 20.5 | 13.3 | 6.5 | 8.3 | 12.5 | ||||||
| Balance of payments | ||||||||||||
| Current account balance | 18.4 | -20.5 | -12.4 | -11.8 | -10.6 | -9.7 | ||||||
| Goods balance | 16.6 | -16.4 | -10.0 | -7.1 | -9.6 | -7.3 | ||||||
| Hydropower exports | 6.8 | 6.4 | 13.0 | 14.8 | 14.4 | 15.9 | ||||||
| Non-hydropower exports | 17.2 | 18.5 | 13.9 | 15.3 | 14.9 | 14.5 | ||||||
| Imports | 40.6 | 41.2 | 36.9 | 37.2 | 39.0 | 37.8 | ||||||
| Services balance | -1.4 | -2.1 | -2.9 | -4.8 | -4.8 | -3.4 | ||||||
| Primary income | -8.4 | -9.0 | -6.6 | -5.7 | -6.4 | -5.1 | ||||||
| Secondary income | 8.1 | 7.0 | 7.1 | 5.9 | 10.3 | 6.1 | ||||||
| Capital account balance | 7.3 | 5.1 | 5.9 | 3.7 | 7.7 | 4.4 | ||||||
| Financial account balance | 17.2 | -14.7 | -21.0 | -21.5 | -14.3 | -11.1 | ||||||
| Net errors and emissions | 19.4 | -0.1 | -2.3 | -13.4 | 0.0 | 0.0 | ||||||
| Overall balance | 25.4 | -0.8 | 12.2 | -3.5 | 11.5 | 5.8 | ||||||
| Gross official reserves (in USD millions) | 1111 | 1345 | 1344 | 1558 | 1844 | 1977 | ||||||
| (In months of goods imports) | 13.1 | 16.0 | 18.1 | 21.0 | 21.4 | 21.8 | ||||||
| (In months of goods and services imports) | 10.7 | 13.1 | 14.7 | 18.2 | 18.7 | 19.3 | ||||||
The expenditure for FY2020/21 and FY2021/22 includes an estimated amount for income support provided to individuals and loan interest payment support to borrowers financed by the National Resilience Fund.
Public and publicly guaranteed debt, including loans for hydropower projects.
Title page
BHUTAN
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
April 26,2022
KEY ISSUES
Context: The pandemic has had a substantial impact on the economy, straining pre-pandemic gains in income and poverty reduction. The wide-ranging policy measures, including containment protocols, rapid vaccination and booster campaigns, direct income support, and policy support for borrowers and businesses, mitigated the adverse impact on lives and well-being. As the pandemic recedes and in light of the uncertainties from the war in Ukraine, the focus needs to be on securing livelihoods and ensuring strong and job-rich medium-term growth, while minimizing any persistent adverse effects from the pandemic and mitigating risks.
Main Policy Recommendations: Policies need to support the recovery in the context of heightened uncertainties from the pandemic and the economic implications of the war in Ukraine, diversify the economy, and boost growth potential.
• Fiscal policy. Fiscal policy should be anchored within a transparent, rolling, and multi-year budget framework, integrated within the five-year plan cycle and support a gradual fiscal consolidation over the medium term. Amid higher debt levels and limited fiscal space, revenue mobilization, including through a smooth implementation of the Goods and Services Tax (GST), is needed to finance Bhutan’s development goals and support the most vulnerable, while ensuring fiscal sustainability. Further developing the domestic debt market would help public financing.
• Monetary and financial sector policy. Accommodative monetary policy remains appropriate amid subdued activity. However, the Royal Monetary Authority (RMA) should shift toward providing targeted support while continuing to closely monitor activity, inflationary pressures, and excess liquidity, and addressing elevated non-performing loans (NPLs).
• Structural policies. Creating new sources of growth, including through digitalization and the ongoing focus on skills, can boost productivity, growth, and employment. Furthering the climate change adaptation agenda will help increase economic resilience.
Approved By
Nada Choueiri (APD) and Kevin Fletcher (SPR)
Remote discussions took place during February 4–18, 2022. The team comprised F. Ahmed (Head), V. Ashtakala, M. MacDonald, T Xu (all APD), and L. Breuer (Senior Resident Representative). T Natarajan (OED) attended all mission meetings. The mission met with the Minister of Finance H.E. Lyonpo Namgay Tshering, the Governor of the Royal Monetary Authority Dasho Penjore, the Minister of Economic Affairs H.E. Lyonpo Loknath Sharma, and other senior government and the RM A officials, along with representatives from the private sector and development partners. M. Conde Panesso (APD) assisted in the preparation of this report.
Contents
CONTEXT AND RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICIES TO SECURE THE RECOVERY AND STRENGTHEN THE OUTLOOK
A Fiscal Policy
B. Monetary Policy
C. Financial Sector Policy
D. External Sector and Exchange Rate Policy
E. Structural Reforms
F. Other Issues
STAFF APPRAISAL
BOXES
1. Multi-Year Rolling Budget Framework Integrated in FYP
2. Digitalization for Economic Transformation
3. On Transforming Bhutan’s Tourism Sector
FIGURES
1. COVID-19 Developments
2. Real Sector Developments
3. Fiscal Developments
4. Financial and Monetary Developments
5. External Developments
TABLES
1. Medium-Term Macroeconomic Framework, 2017–27
2. Government Budget Summary, 2017–27
3. Balance of Payments, 2017–27
4. Monetary Survey, 2013–21
5. Selected Economic and Financial Stability Indicators, 2013–21
APPENDICES
I. COVID-19 Policy Response
II. Risk Assessment Matrix
III. External Sector Assessment
IV. Recent and Planned Capacity Development
V. Uptake of Previous IMF Advice
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussbn by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.orc/extanal/np/sec/misc/qualifiers.htm.
