IMF Executive Board Concludes 2009 Article IV Consultation with Bhutan

Public Information Notice (PIN) No. 09/141
December 30, 2009

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Bhutan is also available.

On December 15, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bhutan.1


Bhutan’s smooth historic transformation into a parliamentary democracy completed in July 2008, together with prudent economic management, strong donor support, and hydropower sector development delivered an average growth of 9½ percent during the 9th Five Year Plan. Poverty declined to 23 percent and various social indicators improved. The global financial turmoil’s economic impact was small due to Bhutan’s limited global integration; adverse effects were felt in tourism and select manufacturing industries exposed to the decline in commodity prices. Consistent with the strong trade ties with India, inflation has been tracking developments in India’s consumer prices, averaging 5 percent in the 9th Plan period and just above 7 percent in 2008/09. The 10th Plan (2008−2013) builds on the successes of the 9th Plan and is pursuing a wide-ranging development agenda to further reduce poverty by promoting industrial, regional, private sector, hydropower, and infrastructure development.

Fiscal policy has been anchored by keeping current spending below domestic revenue. Despite the volatility in both revenue and expenditure arising partly from uncertainty in foreign aid flows, a small current operating surplus (excluding grants) and an overall deficit of 2.7 percent of GDP were achieved in the 9th Plan period. For 2008/09, provisional numbers indicate a surplus in both measures. There is, however, a sharp increase in the deficit to 7.6 percent of GDP in the 2009/10 budget, due to increases in current spending (including the 35 percent wage hike for civil servants from January 2009 and increases in spending on goods and services), a rise in capital spending, and stagnant domestic revenue. As a result, domestic financing is projected to rise to more than 7 percent of GDP in 2009/10 compared with close to zero in the previous year.

Bhutan’s large and volatile trade deficits have been offset by sizeable foreign aid flows, resulting in a balance of payments (BOP) surplus and reserve accumulation. The BOP surplus has averaged about 8 percent of GDP over the last few years and international reserves stand at about $758 million. However, the composition of reserves between convertible currencies and Indian rupees is highly skewed towards the former; this is a concern as high development spending, rapid credit growth, and hydropower-related imports are fueling rupee demand. The two rupee credit lines with India have helped tide over rupee shortfalls arising from mismatches between rupee inflows and outflows.

Excess liquidity in the banking system has been substantially reduced because of measures taken by the Royal Monetary Authority (RMA). The RMA increased the cash reserve requirement from 13 percent to 18 percent during 2007/08, hiked the RMA discount rate from 3½ to 6 percent, and increased the volume of RMA discount bills. An increase in credit by the bank where excess liquidity has historically resided and the sweeping of government accounts by the RMA also contributed to reducing the excess liquidity.

With rapid credit growth—averaging about 30 percent over the last decade—banks’ asset quality is now showing signs of vulnerability. The capital base remains adequate; but non-performing loans have doubled between December 2008 and June 2009 to 18 percent, reflecting the impact of volatile commodity prices on the ferrous-alloy and steel industries. Credit is also concentrated in a few sectors and financial sector vulnerabilities arise from asset-liability mismatches.

Executive Board Assessment

Executive Directors commended the authorities for the strong economic performance anchored by hydropower sector development, and supported by prudent economic management, firm donor support, and political stability. Directors welcomed the successes of the 9th Plan, including lowering poverty, raising per capita income, and improving social indicators. They noted the comprehensive development agenda of the 10th Plan, and considered the challenge was to achieve the Plan goals while maintaining economic and financial stability.

Directors considered the main fiscal challenges were to avoid overheating pressures and ensure debt sustainability. They noted that the sharp deterioration in the budgeted 2009/10 fiscal position, combined with rapid private sector credit growth, risked fueling excess demand and pressuring rupee reserves. Directors stressed the need for spending prioritization with a tightening bias in the short term, and an expansion in the revenue base and careful planning of expenditures over the medium term. Noting the concentration of external debt in commercially viable hydropower projects and Bhutan’s strong track record of project implementation, Directors concluded that Bhutan’s risk of external debt distress remains moderate.

Directors agreed that aligning monetary policy with the peg with the Indian rupee and strengthening financial sector supervision are both necessary for economic stability. Developments in India’s interest rates and consumer prices need to be carefully monitored and Bhutan’s interest rates appropriately adjusted to avoid policy mismatches and unwarranted pressures on rupee reserves. They also noted that active liquidity management, facilitated by periodic T-bill issuance at market-driven interest rates, would aid monetary transmission. Directors welcomed the impending entry of new financial institutions, which should also help improve liquidity distribution. But they emphasized that the new banks could also trigger further credit growth which, in combination with the high NPLs and credit risks in the banking sector, calls for strengthened financial sector supervision to avoid deepening financial sector vulnerabilities.

Directors underscored the importance of adopting clear guidelines for reserve management to help improve the currency composition of reserves. While the rupee credit lines with India are helpful to overcome the periodic pressures on rupee reserves, it is also important to adopt clear reserve management guidelines that harmonize currency composition of reserves with external liabilities and import demand. They noted that expanding non-hydropower exports to India would also help boost rupee receipts.

Directors supported developing a vibrant private sector for job creation. Providing employment opportunities for the projected large increase in the labor force would require developing skill sets that match the job opportunities. Moreover, to reduce the dependence on the civil service as the preferred employer, an enabling environment for private sector development is essential. Directors noted that improving private sector’s access to finance where needed, including through a commercial paper market for inter-corporate borrowing, would facilitate such development.

Directors encouraged the authorities to eliminate the restrictions subject to approval under Article VIII, and remove restrictions maintained under Article XIV as soon as the balance of payments position permits.

Bhutan: Selected Economic and Financial Indicators, 2005/06–2009/10

  2005/06 2006/07 2007/08 2008/09 2009/10
        Est. Proj.

Real sector


Real GDP at market prices (percent change)

6.7 13.2 11.7 5.7 6.6

Consumer prices (percent change, period average)

4.9 5.2 6.3 7.2 8.4

Nominal GDP (at market prices; billions of ngultrum)

37.5 44.5 51.8 57.2 63.5

General government

(In percent of GDP)

Total revenue and grants

35.5 36.2 35.3 35.9 36.5

Foreign grants

17.1 13.5 11.5 11.4 14.1

Total expenditure and net lending

36.7 35.5 34.6 33.7 39.8

Capital expenditure

18.1 18.1 19.3 17.2 20.2

Current balance (excluding grants)

0.6 5.5 5.1 5.2 0.8

Overall balance

-1.2 0.6 0.7 2.2 -3.3

Public sector debt 2/

86.8 75.6 66.6 68.7 72.9

Monetary sector 3/

(Percent change, unless otherwise indicated)

Broad money

41.4 8.6 2.3 24.6 ...

Credit to private sector

33.3 34.6 39.7 29.3 ...

Interest rates (end of period, in percent)


Deposits (less than 1 year)

4.5 4.5 4.8 4.8 ...


10−16 10−16 10−16 10−16 ...

External sector

(In millions of U.S. dollars, unless otherwise indicated)

Current account balance

-38 145 -27 -121 -100

(In percent of GDP)

-4.5 14.4 -2.1 -10.1 -7.4

Trade balance

-123 47 -72 -159 -187

Exports (goods)

312 573 599 457 538

(percent change)

47.2 83.7 4.4 -23.7 17.8

Imports (goods)

435 527 671 616 726

(percent change)

-5.6 21.1 27.4 -8.3 17.9

Grants (current transfer)

161 149 161 152 214

Overall balance

112 122 45 106 86

(In percent of GDP)

13.4 12.1 3.5 8.8 6.4

Gross official reserves

479 600 646 758 842

(In months of goods and services imports)

9.8 9.4 11.3 11.3 10.8

External debt (in percent of GDP)

82.1 72.0 63.9 66.6 68.8

Of which: power sector debt

56.2 47.7 39.2 36.0 37.5

Debt service ratio (in percent of G&S exports)

5.3 3.8 14.2 15.0 14.3

Ngultrum per US$ (period average)

44.7 44.2 40.4 47.8 ...

Memorandum items:


Electricity export (in percent of total goods exports)

28.3 29.6 41.9 45.2 38.1

Unemployment rate (in percent) 4/

3.1 3.2 3.7 ... ...







Sources: Data provided by the 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 and the purchase of one aircraft.

3/ 12-month percent change in June.


4/ On a calendar year basis, e.g., the entry for 2007/08 is for 2007.


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. An explanation of any qualifiers used in summings up can be found here:


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