Public Information Notice: IMF Concludes Article IV Consultation with Bhutan

May 23, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 7, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bhutan.1


Bhutan has adopted a cautious approach to economic development. A careful balance has been struck between modernizing Bhutan and preserving the pristine environment and traditional culture. Although exploitation of the natural resource and tourist potential has been tightly controlled, the economy has enjoyed rapid GDP growth over the past two decades, with dramatic improvements made in social indicators.

For the past two years, growth has been robust and inflation has been moderate in Bhutan. Although southern Bhutan was affected by floods in August 2000, GDP is expected to grow by 6 percent in 2000/01 (year ending June), much the same rate as in 1999/2000. The economy is increasingly dominated by the hydropower sector, and the building of new power projects has led to double-digit growth in the construction and transport sectors. The inflation rate declined to 3½ percent by June 2000 from 12 percent at end-1998 in line with moderating food prices, but picked up to 4½ percent by December 2000 as a result of increases in administered fuel prices.

The Bhutanese authorities have avoided borrowing to finance recurrent expenditures and have maintained the current fiscal balance in surplus. Nonetheless, the overall deficit (including foreign grants) doubled to 4 percent of GDP in 1999/2000, primarily reflecting a pick-up in capital spending once the eighth Five-Year Plan (1997/98-2001/02) gained momentum. The deficit is expected to rise slightly to 4½-5 percent of GDP in 2000/01 as a result of expenditure to rebuild flood-damaged infrastructure.

Despite the rise in electricity exports, the current account deficit widened in 1999/2000. This was due to construction of the new power projects, which led to a surge in capital equipment imports and rising factor service payments. The current account deficit is projected to remain high for the same reasons in 2000/01. However, increased foreign aid, particularly from India associated with the Tala power project, has provided more than commensurate financing and has kept the balance of payments in substantial surplus. Foreign reserves (three quarters of which are in convertible currencies) increased to $309 million at end-September 2000, representing a year and a half of imports, and about 180 percent of total external debt. The debt service ratio is estimated at 5½ percent in 1999/2000.

Large balance of payments surpluses have led to rapid money growth, but credit expansion has been sluggish. Reserve money increased by 50 percent in the two years ending June 2000, almost exactly equal to the buildup in the Royal Monetary Authority's (RMA) net foreign assets over the same period. Broad money growth averaged about 20 percent per annum during 1998/99 and 1999/2000, but credit to the private sector grew by only 5 percent per annum. The increase in bank deposits was largely held as excess reserves with the RMA or on deposit with the State Bank of India. Exclusive of consumer loans, credit to the private sector credit fell by 10 percent in the two years ending June 2000. Slow credit growth apparently reflects a cautious lending culture in the two commercial banks combined with a shortage of investment opportunities.

Bhutan has undertaken important structural reforms over the past few years, which have included: corporatizing government departments (telecommunications); abolishing state monopolies (petroleum distribution); privatizing public enterprises (trade, cement, banks); and providing the legislative building blocks necessary for a modern commercial economy. Nonetheless, there are limited signs to date of growth in the private sector, or of diversification in the economy. Lending to the private sector and nonelectricity exports remain depressed, while GDP growth is heavily dependent on sectors that create little domestic employment.

Executive Board Assessment

Executive Directors commended the authorities for their prudent macroeconomic policies and careful development of the country's natural resources, while achieving major improvements in social indicators. Pointing to this record, the vast potential for growth in the electricity sector, and the strong support of the donor community, they considered Bhutan's medium-term growth prospects to be very favorable.

Directors noted that recent steps to deregulate the economy and foster the private sector have shown limited results to date, and therefore emphasized the importance of devising—in collaboration with the World Bank, the Asian Development Bank, and other development partners—innovative and effective approaches to broaden the economy and generate much-needed job opportunities.

Directors cautioned against further fiscal easing and viewed the upcoming 9th Five-Year Plan as an opportunity to place the overall fiscal deficit on a clearly downward and sustainable path. They underscored the need for additional revenue mobilization to allow for further increases in health and education expenditure, and looked forward to the introduction of the personal income tax as a means of increasing the revenue effort over the longer term. It was suggested that the authorities should also consider the option of issuing long-term government securities to finance capital expenditure. Directors acknowledged that adequate remuneration is essential to retain the strong and efficient civil service but cautioned that wage increases for civil service would influence pay awards elsewhere in the economy and could potentially harm competitiveness.

Directors endorsed continuation of the exchange rate peg to the rupee in light of the strong economic links with India. They noted that in view of the liquidity overhang, the authorities should stand ready to absorb this excess liquidity should it begin to threaten macroeconomic stability. Over the longer term, emphasis should be placed on improving the lending environment, including through measures to develop credit appraisal skills in the financial sector and to stimulate greater competition between lenders.

Directors welcomed the authorities' efforts to address structural obstacles to private investment, including the recent formation of the Private Sector Development Committee. They supported the plans to increase investment in infrastructure so as to lower transport and other business costs and improve access to rural areas, and endorsed the strategy of investing in education and human capital so as to raise labor productivity. They also saw merit in expediting the new foreign investment code.

Directors considered that the comfortable reserve position permits further liberalization of the trade and exchange systems. They encouraged the authorities to assess the scope for further liberalization in light of India's recent removal of quantitative restrictions, as well as Bhutan's prospective accession to the WTO.

While welcoming the efforts to upgrade the statistical system, Directors noted that data limitations continue to hamper the effective assessment of economic developments and policies, and therefore encouraged the authorities to devote further resources to improving statistics.

Bhutan: Selected Economic and Financial Indicators, 1995/96-2000/01 1/

  1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01
          Prov. Proj.

GDP growth and prices (percent change)
Real GDP at factor cost 2/ 7.4 6.0 7.3 5.5 5.9 6.1
Consumer prices 3/ 9.3 7.4 9.0 9.2 3.6 5.0
Government budget (percent of GDP)
Total revenue and grants 42.8 36.8 33.1 40.5 40.4 38.5
Of which: Foreign grants 22.6 17.6 12.1 19.1 16.8 16.3
Total expenditure and net lending 40.6 39.2 32.1 42.3 44.4 43.2
Of which: Current expenditure 18.8 18.5 17.6 18.6 19.0 19.0
Current balance 1.5 0.7 3.4 2.8 4.5 3.1
Overall balance 2.3 -2.4 1.0 -1.8 -3.9 -4.7
Money and credit (percent change)            
Broad money 30.4 30.9 41.7 21.4 21.4 ...
Credit to private sector 11.8 -9.4 13.2 5.4 4.1 ...
Interest rates (end of period)            
Deposits (1 to 3 years) 10.0 10.0 10.0 10.0 9-10.0 ...
Lending 13-16.0 13-16.0 13-16.0 13-16.0 13-16.0 ...
RMA bills (91-days) 8.0 8.5 8.5 4.0 8.5 ...
Balance of payments (millions of US$)
Trade balance 2/ -13.2 -31.9 -24.8 -57.6 -70.7 -81.7
With India 2/ 8.4 4.4 9.3 -17.1 -31.1 -45.4
Current account balance 4/ -37.1 -56.4 -46.5 -97.9 -126.8 -126.2
(In percent of GDP) -12.1 -15.9 -12.0 -24.4 -28.4 -26.8
With India -6.0 -13.1 -25.5 -71.9 -99.6 -99.2
(In percent of GDP) -2.0 -3.7 -6.6 -17.9 -22.3 -21.1
Grants 79.7 74.4 85.4 120.8 149.9 129.1
Of which: India 31.1 38.5 64.1 89.5 116.2 100.1
Loans (net) -12.1 5.4 4.4 26.0 18.6 29.7
Errors and omissions -5.6 -1.2 2.1 -5.8 -5.3 -4.7
Overall balance 24.9 22.2 45.4 44.2 36.4 27.9
(In percent of GDP) 8.1 6.3 11.7 11.0 8.2 5.9
External indicators            
Gross official reserves (millions of US$) 145.1 176.0 215.6 258.5 292.6 320.5
(In months of imports) 15.7 16.1 19.0 19.1 19.0 19.9
External debt (millions of US$) 111.5 112.2 128.0 160.4 172.8 202.5
(In percent of GDP; end of period) 37.3 31.7 36.7 40.7 39.7 43.5
Debt-service ratio (percent of exports) 13.2 9.8 8.3 8.1 5.6 5.5
Memorandum items:            
Nominal GDP (in millions of ngultrum) 2/ 9,611 11,355 13,971 15,928 18,202 20,686
Ngultrum per US$ (period average) 34.3 35.8 38.4 42.6 43.6 ...

Sources: Data provided by the Bhutanese authorities; and IMF staff estimates and projections.

1/ Fiscal year beginning July 1.
2/ On a calendar-year basis, i.e., the entry under 1995/96 is for 1995, etc.
3/ Bhutan's CPI does not include rents and other services and is based on a 1979 expenditure survey.
4/ Excluding grants.

1 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 discussion 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. This PIN summarizes the views of the Executive Board as expressed during the May 7, 2001 Executive Board discussion based on the staff report.


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