Abstract
On behalf of our Bhutan authorities, we thank the IMF team led by Mr Ahmed for the productive engagement during the Article IV consultations. Our authorities are appreciative of their deep understanding of the macro-economic situation in Bhutan and the constructive discussions on a wide range of policy issues. They highly value the staff report, assessments, and recommendations. Our remarks will focus on the macroeconomic outlook and important policy issues.
On behalf of our Bhutan authorities, we thank the IMF team led by Mr Ahmed for the productive engagement during the Article IV consultations. Our authorities are appreciative of their deep understanding of the macro-economic situation in Bhutan and the constructive discussions on a wide range of policy issues. They highly value the staff report, assessments, and recommendations. Our remarks will focus on the macroeconomic outlook and important policy issues.
Recent Economic Developments and Macroeconomic Outlook
1. Economic activity was severely impacted due to the COVID-19 pandemic and the adoption of various containment measures including periodic lockdowns, business closures, border closures, and social distancing norms. GDP contracted by 2.4 percent in 2019–20 and 3.7percent in 2020–21 compared to a growth of 4.4 percent in 2018–19. The stark contrast to the 6.3 and 6 percent growth estimated for 2019–20 and 2020–21 in the 2018 Article IV Report provides a measure of the extent of impact of the pandemic. The severity of contraction was most pronounced in construction, transportation, and tourism sectors. On the upside, agriculture and electricity sectors witnessed notable performance during the period.
2. Decisive policy measures taken by the authorities helped to contain the pandemic and loss of lives and mitigate socio-economic costs. Performing one of the fastest vaccination campaigns in the world, Bhutan achieved full vaccination of the adult population by July 2021 and of children above 5 years by March 2022. Supported by an effective vaccination campaign and strong hydroelectricity exports, the economy is expected to witness gradual recovery in 2021–22 and is projected to grow at 4.4 percent.
3. The continuing uncertainties due to the new omicron variant, geopolitical conflicts, supply disruptions, and high oil and commodity prices are expected to weaken demand in the economy. The overall annual CPI inflation stood at 5.3 percent in February 2022 compared to 9.5 percent during the same month of the previous year The non-food prices recorded an increase of 6.4 percent, while the food prices recorded a growth of 4.1 percent. The non-food price increase accounted for 62 percent of the overall inflation rate while the remaining was contributed by food prices.
4. Medium-term growth is expected to be driven by the revival of services and manufacturing activities and a boost in hydropower generation. As the pandemic-related measures are phased out, the fiscal position is expected to significantly improve. The current account deficit and reserve coverage are expected to improve due to an increase in hydropower exports and a decrease in hydropower-related imports. The hydropower sector constitutes 17 percent of Bhutan’s GDP and the share of electricity exports which was 26 percent of exports in 2018–19 is estimated to increase to 49 percent 2021–22 and is projected to further increase to 57 percent in 2026–27.
Gross National Happiness
5. Bhutan’s long-term growth strategy is underpinned by its unique developmental philosophy, Gross National Happiness (GNH). This multi-dimensional development approach built on 4 pillars of sustainable & equitable socio-economic development, good governance, environmental conservation, and preservation & promotion of culture seeks to achieve a balance between material well-being and the spiritual, cultural, and material needs of the citizens. Gross National Happiness Commission plays a central role in Bhutan’s national planning with emphasis on education, health, and finance. With focused efforts, Bhutan’s human development index has improved from 0.52 in 2005 to 0.628 in 2015 and 0.654 in 2019. Significant improvement was made in per capita income and reducing poverty prior to the pandemic, qualifying Bhutan’s graduation from least developed country status by 2023. The share of population living on less than $ 3.20 per day fell from 14.7 percent in 2012 to 10.7 percent in 2019, marginally increasing to 11.2 percent in 2020.
6. Tourism is anchored on the GNH approach to sustainability and wellness. The sector suffered severely during the pandemic as international tourism receipts declined from about US $120 million in 2019 to 84 million in 2020. During the same period, international tourism receipts as a share of exports declined from 15.4 to 10.7 percent significantly impacting employment and livelihood. Giving thrust to transform the tourism sector, the authorities are making intense efforts to build the ‘Brand Bhutan’ based on the ‘high value and low volume’ approach to promote wellness, agro-tourism, community, and eco-tourism products.
Fiscal Policy
7. Five-Year Plans (FYP) provide a blueprint for long-term planning and integrating a rolling budget framework within FYP can help to reduce volatility in managing long-term projects. About33 percent of the capital outlay in the 12th FYP has been allocated tobudget2021–22 with a focus on health, education, and infrastructure. Capital expenditure which was 12.6 percent of GDP in 2019–20 is expected to increase to 18.2 percent in 2021 -22. Targeted pandemic measures can reduce the fiscal deficit which increased to about6.3 percent in 2020–21 compared to 1.9 percent in 2019–20 due to pandemic-related expenditure.
8. Our authorities recognize the need for ramping up revenue mobilization and medium-term fiscal consolidation. Implementation of GST is expected to kick start soon and along with proposed direct tax and property tax reforms is expected to provide a significant boost to revenue mobilization. Preliminary assessments indicate an increase in tax revenue by about 0.4 percent of GDP initially and increasing to 2 percent in the medium-term.
9. Overall debt stress is moderate despite a significant increase in the debt-to-GDP ratio by about 29 percent, reaching about 135 percent in 2020–21. Taking note of the staff assessment of debt sustainability, the authorities highlight the mitigating factors that support debt sustainability, enhance fiscal consolidation, and moderate debt-to-GDP ratio. Apart from tax revenue mobilization measures, these include a significant increase in electricity exports and the completion of hydropower construction. External debt risk is expected to remain moderate as most of Bhutan’s external debt is linked to hydropower loans from India which covers the financial and construction risks.
Monetary Policy
10. Monetary measures taken during the pandemic enhanced liquidity and credit and helped banks to extend concessional loans to businesses. Excess liquidity was a result of a mismatch due to strong growth in deposits and weak credit demand. Broad money grew by 17.0 percent in November 2021 compared to 21.4 percent in the previous year. Aggregate deposits held by the commercial banks grew by 18.7 percent in November 2021 compared to 22.3 percent in the previous period, domestic credit witnessed an increase in growth by 23.9 percent compared to only 2.3 percent in the previous period. Going forward, the authorities concur on the need for Domestic Liquidity Management Framework (DLMF) and digitalization of the financial system.
Financial Sector
11. Our authorities recognize the risks to the financial sector stemming from pre-pandemic vulnerabilities and the need to move from broad-based support measures to provide support to targeted sectors, individuals, and businesses that are most affected by the pandemic. They are committed to continuing the implementation of the NPL resolution framework and Risk-based Supervisory framework (RBS) to boost long-term financial stability. This includes implementation of RBS across all financial institutions and putting in place an efficient risk management framework.
External Sector and Exchange-Rate Policy
12. Current account deficit has narrowed due to an increase in hydropower exports and a decline in construction-related imports. With adequate reserve coverage and an expected increase in electricity exports, the external financing risk is assessed to be low. Our authorities concur with the staff assessment of the adequacy and appropriateness of the exchange rate peg as a nominal anchor and reiterate the importance of Rupee reserves as external buffer. Rupee reserves have increased over the two years from 16 to 26 percent in 2020–21.
Structural Reforms
13. Structural reforms are critical for diversifying the economy and boosting long-term growth. The post-pandemic recovery provides an opportunity for diversification that include high value-added activities. One of the three carbon negative countries in the world, Bhutan is exposed to risks of natural disasters stemming from climate change, particularly in water-dependent sectors. Climate-resilient budgeting is aimed to support climate change adaptation, disaster risk management, and further greening of energy sources.
14. Special attention is given to the tourism sector by the authorities by improving infrastructure, provision of skills training, and dissemination of related digital content. Digital Drukyul Flagship program is aimed to promote inclusion by leveraging digitalization. During the pandemic, extensive programs for addressing skill mismatches and unemployment were executed, and many could be continued post-pandemic. Measures for enhancing physical and digital infrastructure with a focus on productivity would be a priority in the 13th FYP.
Capacity Development
15. Our authorities are deeply appreciative of the ongoing CD support provided by the Fund and expressed keenness in strengthening collaboration in digital currency, bond market development, and data coverage.