IMF Executive Board Concludes 2016 Article IV Consultation with Bhutan

June 29, 2016

On June 22, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Bhutan.

Bhutan has made significant economic progress in recent years and the GDP per capita more than doubled during 2004-2014, rising from $1,108 to $2,612. In the aftermath of the rupee shortage episode of 2012-13, GDP growth has slowed to below 4 percent in Fiscal Year (FY) 2012/13 and FY2013/14 (July 1 – June 30). Measures to cool down activity contributed to the slowdown. However, GDP growth is estimated to have picked up to 5.2 percent in FY2014/15 and is projected to reach 6 percent in FY2015/16. Inflation has decelerated rapidly, from 11.3 percent in Q4 2013 to below 3 percent in Q1 2016, though it is projected to return to about 5 percent. Following the slowdown in the wake of the rupee shortage crisis, growth in credit to the private sector has picked up. The fiscal balance switched from a deficit of 4.2 percent in FY 2012/13 to a surplus of 3.8 percent in FY2013/14, and 1.5 percent of GDP in FY2014/15, reflecting mainly lower capital spending in the early years of the 11th Five Year Plan (2013/14 – 2017/18). The current account deficit has been approaching record high levels in recent years, reflecting hydropower investment. These deficits were financed by robust aid inflows, and the overall balance of payments remained generally positive, allowing further accumulation of international reserves.

Growth is projected to accelerate further in the coming years, to 6.4 percent in FY2016/17 and to over 11 percent in FY2017/18, supported by hydropower construction and the commissioning of new hydropower plants, as well as solid growth in domestic services. The increase in hydropower generation capacity will boost electricity exports, and as a result, the current account deficit will decline rapidly, from over 30 percent in FY2016/17 to around 5 percent in FY2020/21. Reflecting accelerated capital spending in the final years of the 11th Five-Year Plan, fiscal balance is projected to turn to a moderate deficit in FY2016/17.

Risks are linked mainly to the high public external debt and the need to manage projected large hydropower-related revenues. If not properly managed, the large pickup in hydropower exports and the projected increase in export earnings and budget revenues could undermine macroeconomic stability and the competitiveness of the economy, resulting in overheating and external imbalances akin to those seen during 2012-13. In addition, Bhutan’s growth could be adversely affected by a growth slowdown in India triggered by delays in structural reforms. Also, as illustrated by the slowdown in tourist arrivals in the wake of Nepal’s earthquake, the Bhutanese tourism industry is susceptible to adverse regional developments.

Executive Board Assessment2

Executive Directors welcomed the improvement in Bhutan’s macroeconomic performance and commended the authorities for the significant economic and social gains of recent years. Directors also considered that the outlook was favorable going forward. However, the current account deficit and external public debt remain high, mainly reflecting developments in the hydropower sector. Accordingly, Directors cautioned that while hydropower development brings opportunities, it also creates macroeconomic challenges that need to be managed carefully to avoid overheating and imbalances. Moreover, strong efforts are required to increase employment opportunities, especially for the youth, through enhanced skills and training, and economic diversification.

Directors noted that the favorable fiscal outcomes in recent years reflected slower-than-projected implementation of investment projects. They recommended balancing acceleration of capital spending with maintaining sound fiscal balances and macroeconomic stability. Directors underscored the need to improve tax revenue collection and limit exemptions, especially given the expected gradual phasing out of donor assistance and the need for higher social spending. They welcomed plans to introduce a modern goods and service tax and encouraged the authorities to ensure timely implementation by 2018.

Directors considered the current monetary policy stance to be broadly appropriate and commended the authorities for the recent tightening. Directors recommended close monitoring of liquidity, credit and inflation, and encouraged the authorities to stand ready to adjust monetary policy as needed. They also recommended further improvement of the liquidity management system.

Given close economic ties with India, Directors agreed that the exchange rate peg to the Indian rupee has served Bhutan well and remains an appropriate nominal anchor, even as the ngultrum is moderately overvalued. They emphasized that macroeconomic stability and improvements in the business climate and competitiveness are essential to support the peg.

Directors welcomed the authorities’ plans to strengthen reserve management. They noted that while the level of international reserves remains adequate, there is room for improvement in the composition of reserves to better align it with the structure of external debt and trade flows.

Directors noted the Royal Monetary Authority’s recent efforts to strengthen macroprudential regulation and supervision and welcomed the introduction of additional tools. They emphasized the need to fill remaining regulatory gaps, including in the regulation of nonbank financial institutions.

Directors encouraged elimination of exchange rate restrictions as soon as macroeconomic conditions allow.

Bhutan: Selected Economic Indicators, 2012/13–2017/18 1/
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Est. Proj.

Real sector

Real GDP at market prices (percent change)

3.6 3.8 5.2 6.0 6.4 11.3

Consumer prices (percent change, period average)

11.3 10.0 6.4 4.4 4.6 5.1

General government

(In percent of GDP)

Total revenue and grants

30.2 33.6 28.9 31.5 27.2 27.3

Tax revenue

15.2 14.4 14.7 13.2 13.2 12.6

Non-tax revenue

5.6 6.3 5.4 5.7 5.0 4.5

Foreign grants

9.4 12.7 8.0 12.3 9.0 10.2

Total expenditure and net lending

34.4 29.8 27.4 30.9 28.4 26.6

Current expenditure

17.8 16.0 16.8 17.3 16.8 16.0

Capital expenditure

18.2 14.8 12.3 14.9 12.9 11.8

Current balance (excluding grants)

3.0 4.7 3.3 1.6 1.4 1.1

Overall balance

-4.2 3.8 1.5 0.6 -1.2 0.7

Public sector debt 2/

99.9 96.4 96.5 105.5 113.6 112.7

Monetary sector

(Percent change, unless otherwise indicated)

Broad money

18.6 6.6 7.8

Credit to private sector

6.2 5.1 11.0

Interest rates (end of period, in percent)

Term Deposit Rates

5.0-9 5.0-8.7 4.0-10


11.5-16 10.0-16 11.7-17

RMA bills (91-days)

3 2.3 0.13

External sector

(In millions of dollars, unless otherwise indicated)

Current account balance

-470 -483 -581 -579 -708 -528

(In percent of GDP)

-25.4 -26.4 -28.8 -27.8 -31.5 -20.7

Trade balance

-377 -393 -419 -550 -630 -474

Exports (goods)

546 535 578 556 579 751

(Percent change)

-11.5 -2.0 8.2 -3.9 4.0 29.8

Of which : Electricity

188 167 181 192 180 315

Imports (goods)

-923 -928 -998 -1,107 -1,177 -1,174

(Percent change)

-8.8 0.5 7.5 11.0 6.2 -0.2

Grants (current transfer)

86 63 77 111 88 113

Capital and financial account balance

557 638 633 762 724 787

Loans (net)

244 355 374 339 346 343

Errors and omissions

80 -85 -60 0 0 0

Overall balance

168 70 -9 183 16 259

(In percent of GDP)

9.1 3.8 -0.4 8.8 0.7 10.2

Gross official reserves

917 982 958 1,141 1,157 1,417

(In months of goods and services imports)

11.9 11.8 10.4 11.3 11.3 13.1

External debt (in percent of GDP)

94.1 93.6 94.5 105.8 113.0 110.7

Ngultrum per U.S. dollar (period average)

54.9 61.5 62.1

Memorandum items:

GDP at market prices (in millions of U.S. dollars)

1848.7 1829.6 2017.1 2084.8 2251.1 2549.5

Electricity exports (in percent of total goods exports)

34.5 31.2 31.4 34.6 31.2 42.0

Unemployment rate (in percent) 3/

2.1 2.9 2.6

Sources: Bhutanese authorities; and IMF staff estimates and projections.

1/ Fiscal year begins July 1.

2/ Public and publicly guaranteed debt, including loans for hydropower projects.

3/ On a calendar year basis (e.g., the entry for 2012/13 is for 2012).

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.

2 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 summings up can be found here:

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