Bhutan’s Economy Maintains Robust Growth Despite Challenges

THIMPHU —Bhutan’s economy continues its strong recovery from the COVID-19 pandemic, according to two new World Bank reports launched today.

The April 2024 Bhutan Development Update indicates that economy is showing signs of a strong recovery with an expected 4.6 percent real GDP growth in FY22/23, driven by higher growth in tourism activity, following economic contraction over two consecutive years due to the COVID-19 pandemic. Growth is expected to accelerate to 4.9 percent in FY23/24.

“To maintain a strong and inclusive growth, Bhutan can do more to enable the business environment to attract Foreign Direct Investments and promote the private sector to create more jobs that appeal to the aspirations of its citizens”, said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan. “Further, it will equally be important for the government to timely address the increasing stress on services delivery because of human resources challenges.”

Despite the relatively robust growth in recent years, downside risks to the economy persist. The fiscal deficit is expected to widen in FY23/24 to 5 percent of GDP as expenditure outpaces revenue, due to significant salary increases for public sector employees. Over the last year, there has been a significant decline in international reserves, but they have begun to stabilize as the current account deficit showed signs of narrowing in the first quarter of FY23/24, following a significant expansion in FY22/23. Risks include delayed fiscal consolidation, vulnerabilities in the financial sector, volatile international commodity prices and delays in hydropower projects.

The report includes a special section on labor market and jobs. Bhutan’s labor remains predominantly employed in the low productivity sectors. Workers face many challenges, including limited inclusion of women in meaningful employment and persistence of low-productivity agricultural employment. Employment quality outside of the public sector remains weak, leading to public sector queuing, rising unemployment among urban workers, and a record number of Bhutanese migrating abroad.

The 2023 Public Expenditure Review for Bhutan emphasizes the critical importance of efficient public spending and enhanced domestic resource mobilization to help achieve Bhutan’s long-term development goals.

Bhutan’s revenue collection remains largely driven by the hydropower sector, which contributes significantly to both tax and non-tax revenue collection. However, the contribution from the direct taxes without the hydropower sector remained stagnant. Bhutan’s capital expenditure as a share of GDP is among the highest globally, and expenditures on salary and allowances consume a significant portion of the current expenditure. While Bhutan’s commitment to education and healthcare remains robust, there are opportunities to improve spending efficiency.

“Greater contribution from direct taxes beyond the hydropower sector, coupled with a more effective tax administration system, could bolster Bhutan’s ability to generate increased revenues essential for its development,” said Hoon Sahib Soh, World Bank Practice Manager for Macroeconomics, Trade & Investment for South Asia Region.

State enterprises in Bhutan contribute significantly to budget revenues and create jobs but suffer from profitability and performance challenges. Although Bhutan has enhanced its legal and regulatory framework for state enterprise management, key policy gaps persist, including ownership and dividend policies.

“Further improvements in managing investments, corporate governance and financial reporting, can help improve performance of state enterprises and reduce fiscal risks”, said Adama Coulibaly, World Bank Resident Representative for Bhutan.