IMF Executive Board Concludes 2011 Article IV Consultation with Bhutan

Public Information Notice (PIN) No. 11/67
May 31, 2011

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, 27, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bhutan.1


Following its transition into a parliamentary democracy in 2008, Bhutan has enjoyed political stability and the transition to a full participatory democracy has proceeded steadily. Growth has been strong, averaging around 8 percent in the last decade. The hydropower sector, supported by grants and strong ties to from India, has been the main driver, while construction and the services sector also saw robust growth. Inflation has risen, tracking closely price developments in India, which supplies about three-quarters of Bhutan’s imports. Social development indicators are progressing steadily, and Bhutan is on track or has achieved most of its Millennium Development Goals.

Bhutan’s near-term outlook is favorable, but there are risks of overheating. Growth is expected to remain at around 8 percent. The current account deficit will remain high due to hydropower-related imports, but financing from India and other development partners is expected to be adequate. As a result, the overall balance of payment is projected to remain in surplus. At the same time, inflation is expected to decline while remaining somewhat elevated (at around 6 percent), with inflation risks to the upside.

Despite challenges, the medium-term outlook is also positive. Growth is projected to remain robust at 8–9 percent over the remainder of the 10th Five Year Plan (FYP; 2011–13), in part driven by the construction of new hydropower projects. The current account deficit is expected to widen as the construction of hydropower projects pick up steam. Pressure on the overall balance of payments, however, is expected to remain manageable as associated loan disbursements from India are also projected to increase.

Over the medium term, implementing key structural reforms is critical to sustaining rapid growth. If the development spending crowds in more private sector investment, higher productivity could provide a boost to the economy. Strong growth in India should also continue to underpin export growth. At the same time, private sector development could slow down if implementation capacity constraints are not eased and the provision of infrastructure by the public sector falls short of envisaged levels. Aid inflows — particularly current grants — are expected to decline, as Bhutan’s per capita income has risen rapidly over the last decade. Medium term prospects would also suffer if public investment financing needs are not met by domestic revenue.

Executive Board Assessment

Executive Directors welcomed Bhutan’s strong economic performance in recent years and the steady progress on social indicators. The medium-term prospects are favorable, anchored by hydropower sector development. Notwithstanding these positive developments, the economy faces near-term challenges, especially overheating stemming from higher prices, strong economic growth and rapid credit expansion. Directors encouraged the authorities to tighten macroeconomic policies, while continuing their efforts to promote economic diversification.

Directors emphasized that tighter monetary policy should help mitigate the risk of overheating. In general, they observed that raising interest rates would help curb credit growth, which would in turn reduce balance of payments pressures. Directors also encouraged the authorities to closely monitor excess liquidity and improve the monetary transmission mechanism.

Directors welcomed increased competition in the banking system and stressed that stronger regulatory and supervision capacity would safeguard financial stability.

Directors agreed that a tighter fiscal stance is essential for sustaining macroeconomic stability and that spending and revenue reforms would bolster the fiscal framework. Establishing a nominal ceiling on current spending would help create fiscal space for capital spending and make fiscal policy more countercyclical. Directors encouraged the authorities to implement revenue measures to help finance prospective public investment. Given the concentration of debt in commercially viable hydropower projects and India’s rapid energy demand growth, Directors generally agreed that Bhutan’s risk of debt distress remains moderate.

In light of Bhutan’s strong ties with India, Directors agreed that the peg with the Indian rupee remains appropriate and that it has served the country well. They noted that promoting the diversification of the economy and facilitating private sector development would help strengthen Bhutan’s competitiveness and balance of payments position.

Directors encouraged progress towards the timely elimination of the exchange restrictions subject to approval under Article VIII and the restrictions maintained under Article XIV.

Bhutan: Selected Economic and Financial Indicators, 2007/08–2011/12 1/

Nominal GDP (2009): US$1,265 million


Population (2009): 0.697 million


GDP per capita (2009): US$1,815


Quota: SDR 6.3 million

  2007/08 2008/09 2009/10 2010/11 2011/12
      Est. Proj. Proj.

Real sector


  Real GDP at market prices (percent change)

10.8 5.7 7.5 8.2 8.3

  Consumer prices (percent change, period average)

6.3 7.1 4.8 6.8 5.8

  Nominal GDP (at market prices; billions of ngultrum)

52.1 58.0 66.2 76.4 87.8

General government

(In percent of GDP)

  Total revenue and grants

35.1 35.6 41.0 39.5 30.9

    Tax revenue

9.0 9.9 13.6 13.5 12.9

    Non-tax revenue

14.7 14.4 10.1 8.7 7.9

    Foreign grants

11.4 11.3 17.3 17.3 10.1

  Total expenditure and net lending

34.7 33.3 38.4 44.1 37.7

    Current expenditure

18.7 19.1 19.5 20.1 19.4

    Capital expenditure

19.2 16.9 19.5 25.2 19.6

  Current balance (excluding grants)

5.0 5.2 4.1 2.1 1.4

  Overall balance

0.4 2.3 2.5 -4.6 -6.8

  Public sector debt 2/

66.2 67.7 70.9 81.3 95.3

Monetary sector 3/

(Percent change, unless otherwise indicated)

  Broad money

2.3 24.6 30.1 26.7

  Credit to private sector

39.7 29.3 41.1 45.5

  Interest rates (end of period, in percent)


    Deposits (less than 1 year)

4.8 4.8 5.0 5.0 ...


10-16 10-16 10-16 10-16 ...

External sector

(In millions of dollars, unless otherwise indicated)

  Current account balance

-27 -20 -188 -224 -313

    (In percent of GDP)

-2.1 -1.6 -13.2 -14.9 -18.8

      Trade balance

-72 -90 -299 -347 -347

      Exports (goods)

599 516 544 549 583

          (percent change)

4.4 -13.8 5.5 0.8 6.3

        Imports (goods)

671 607 843 896 930

          (percent change)

27.4 -9.6 39.0 6.3 3.9

      Grants (current transfer)

161 151 270 291 188

  Capital account balance

140 106 150 243 335

    Loans (net)

25 88 47 136 160

  Overall balance

45 119 94 19 22

    (In percent of GDP)

3.5 9.8 6.7 1.3 1.3

  Gross official reserves

646 773 868 887 909

    (In months of goods and services imports)

11.4 9.9 10.5 10.3 9.6

  External debt (in percent of GDP)

63.5 65.6 67.7 76.5 85.8

    Of which: power sector debt

38.9 35.5 34.7 37.4 45.9

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

14.2 13.4 14.3 13.9 14.2

  Ngultrum per US$ (period average)

40.4 47.8 46.7

Memorandum items:


  Electricity exports (in percent of total goods exports)

41.9 42.3 39.2 36.1 31.0

  Unemployment rate (in percent) 4/

3.7 4.0 3.3 ... ...

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/ End-November 2010 data for 2010/11.

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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