IMF Executive Board Concludes 2016 Article IV Consultation with Bhutan
IMF News, June 29, 2016
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- Published: June 29, 2016
Macroeconomic developments and recent performance
- GDP per capita more than doubled during 2004-2014, rising from $1,108 to $2,612.
- GDP growth:
- Slowed to below 4 percent in Fiscal Year (FY) 2012/13 and FY2013/14.
- Estimated to have picked up to 5.2 percent in FY2014/15.
- Projected to reach 6 percent in FY2015/16.
- Projected to accelerate to 6.4 percent in FY2016/17 and to over 11 percent in FY2017/18, supported by hydropower construction and commissioning of new hydropower plants and solid growth in domestic services.
- Inflation:
- Decelerated from 11.3 percent in Q4 2013 to below 3 percent in Q1 2016.
- Projected to return to about 5 percent.
- Credit and liquidity:
- Growth in credit to the private sector picked up following the rupee shortage crisis of 2012-13.
- Monetary policy stance considered broadly appropriate with recent tightening.
- Fiscal position:
- 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 early years of the 11th Five Year Plan).
- 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.
- External sector and reserves:
- Current account deficits have been approaching record high levels in recent years, reflecting hydropower investment; these deficits were financed by robust aid inflows.
- Overall balance of payments remained generally positive, allowing accumulation of international reserves.
- Increase in hydropower generation capacity will boost electricity exports and is projected to reduce the current account deficit from over 30 percent in FY2016/17 to around 5 percent in FY2020/21.
Risks and vulnerabilities
- High public external debt, largely reflecting hydropower sector developments, constitutes a major risk.
- Managing projected large hydropower-related revenues is critical; if not properly managed, the large pickup in hydropower exports and the projected increase in export earnings and budget revenues could:
- Undermine macroeconomic stability.
- Undermine competitiveness.
- Result in overheating and external imbalances similar to those seen during 2012-13.
- External spillovers:
- Bhutan’s growth could be adversely affected by a growth slowdown in India triggered by delays in structural reforms.
- The tourism industry is susceptible to adverse regional developments (example: slowdown in tourist arrivals after Nepal’s earthquake).
Executive Board assessment and policy recommendations
- Directors welcomed improvement in macroeconomic performance and commended economic and social gains.
- Directors’ cautions and recommendations:
- Hydropower development brings opportunities but also macroeconomic challenges that need careful management to avoid overheating and imbalances.
- Strong efforts required to increase employment opportunities, especially for the youth, through enhanced skills and training, and economic diversification.
- Balance acceleration of capital spending with maintaining sound fiscal balances and macroeconomic stability.
- Improve tax revenue collection and limit exemptions, given expected gradual phasing out of donor assistance and the need for higher social spending.
- Introduce a modern goods and service tax and ensure timely implementation by 2018.
- Closely monitor liquidity, credit and inflation; stand ready to adjust monetary policy as needed.
- Further improve the liquidity management system.
- Maintain the exchange rate peg to the Indian rupee as an appropriate nominal anchor given close economic ties with India, while noting the ngultrum is moderately overvalued; emphasize that macroeconomic stability and improvements in the business climate and competitiveness are essential to support the peg.
- Strengthen reserve management and improve the composition of reserves to better align with the structure of external debt and trade flows.
- Continue to strengthen macroprudential regulation and supervision; fill remaining regulatory gaps, including regulation of nonbank financial institutions.
- Encourage elimination of exchange rate restrictions as soon as macroeconomic conditions allow.
Key statistics and projections (selected)
- Real GDP at market prices (percent change):
- 2012/13: 3.6
- 2013/14: 3.8
- 2014/15: 5.2
- 2015/16: 6.0
- 2016/17: 6.4
- 2017/18: 11.3
- Consumer prices (percent change, period average):
- 2012/13: 10.0
- 2013/14: 4.4
- 2014/15: 4.6
- 2015/16: 5.1
- General government (In percent of GDP):
- Total revenue and grants:
- 2012/13: 30.2
- 2013/14: 33.6
- 2014/15: 28.9
- 2015/16: 31.5
- 2016/17: 27.2
- 2017/18: 27.3
- Tax revenue:
- 2012/13: 15.2
- 2013/14: 14.4
- 2014/15: 14.7
- 2015/16: 13.2
- 2016/17: 12.6
- Foreign grants:
- 2012/13: 9.4
- 2013/14: 12.7
- 2014/15: 8.0
- 2015/16: 12.3
- 2016/17: 9.0
- 2017/18: 10.2
- Total expenditure and net lending:
- 2012/13: 34.4
- 2013/14: 29.8
- 2014/15: 27.4
- 2015/16: 30.9
- 2016/17: 28.4
- 2017/18: 26.6
- Current balance (excluding grants):
- 2012/13: 3.0
- 2013/14: 4.7
- 2014/15: 3.3
- 2015/16: 1.6
- 2016/17: 1.4
- 2017/18: 1.1
- Overall balance:
- 2012/13: -4.2
- 2013/14: 1.5
- 2014/15: 0.6
- 2015/16: -1.2
- 2016/17: 0.7
- Public sector debt (percent of GDP, public and publicly guaranteed, including loans for hydropower projects):
- 2012/13: 99.9
- 2013/14: 96.4
- 2014/15: 96.5
- 2015/16: 105.5
- 2016/17: 113.6
- 2017/18: 112.7
- External sector (in millions of dollars unless otherwise indicated):
- Current account balance:
- 2012/13: -470
- 2013/14: -483
- 2014/15: -581
- 2015/16: -579
- 2016/17: -708
- 2017/18: -528
- Trade balance:
- 2012/13: -377
- 2013/14: -393
- 2014/15: -419
- 2015/16: -550
- 2016/17: -630
- 2017/18: -474
- Exports (goods):
- 2012/13: 546
- 2013/14: 535
- 2014/15: 578
- 2015/16: 556
- 2016/17: 579
- 2017/18: 751
- Of which: Electricity exports (goods, in millions of dollars):
- 2012/13: 188
- 2013/14: 167
- 2014/15: 181
- 2015/16: 192
- 2016/17: 180
- 2017/18: 315
- Imports (goods):
- 2012/13: -923
- 2013/14: -928
- 2014/15: -998
- 2015/16: -1,107
- 2016/17: -1,177
- 2017/18: -1,174
- Grants (current transfer):
- 2012/13: 86
- 2013/14: 63
- 2014/15: 77
- 2015/16: 111
- 2016/17: 88
- 2017/18: 113
- Capital and financial account balance:
- 2012/13: 557
- 2013/14: 638
- 2014/15: 633
- 2015/16: 762
- 2016/17: 724
- 2017/18: 787
- Gross official reserves:
- 2012/13: 917
- 2013/14: 982
- 2014/15: 958
- 2015/16: 1,141
- 2016/17: 1,157
- 2017/18: 1,417
- External debt (in percent of GDP):
- 2012/13: 94.1
- 2013/14: 93.6
- 2014/15: 94.5
- 2015/16: 105.8
- 2016/17: 113.0
- 2017/18: 110.7
- Memorandum items:
- GDP at market prices (in millions of U.S. dollars):
- 2012/13: 1848.7
- 2013/14: 1829.6
- 2014/15: 2017.1
- 2015/16: 2084.8
- 2016/17: 2251.1
- 2017/18: 2549.5
- Electricity exports (in percent of total goods exports):
- 2012/13: 34.5
- 2013/14: 31.2
- 2014/15: 31.4
- 2015/16: 34.6
- 2016/17: 42.0
- Unemployment rate (in percent) (calendar year basis):
- 2012/13 (2012): 2.1
- 2013/14 (2013): 2.9
- 2014/15 (2014): 2.6
Press Release No. 16/313 — IMF Communications Department, June 29, 2016.