Economic Profile of Bhutan

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1 Economic Profile of Bhutan Submitted to: Dr. Ahmed Tazmeen Assistant Professor, Department of Economics North South University Submitted By: Namgay Wangmo MPPG 6th Batch ID # Date of Submission: 31 st May,

2 Bhutan s Economy Background The economic development of Bhutan begins from early 1960s with the inception of first five year plan (1 st FYP). Bhutan s economy is one of the world s smallest and least developed, and is based on select sectors, such as tourism, agriculture, forestry and hydroelectricity. Agriculture and forestry provides the main means of livelihood for over 60% of the population. The economy, although aligned with India through trade links, is still underdeveloped due to the country s rugged terrain and other geographical constraints. The industrial sector is largely dependent on cottage industries and other small scale ventures. Bhutan s connections to global markets are limited and dominated significantly by India. The economy is closely aligned with India s through strong trade and monetary links and is dependent on India for financial assistance and migrant laborers for development projects, especially for road construction. Economic Growth, Gross Domestic Product and Business Cycle Until a few decades ago, Bhutan was agrarian with few roads, less electricity and no modern hospitals. Although the Bhutanese economy is a fledgling one, several hydroelectric projects, supported by the government, have boosted revenues and exports. According to the International Monetary Fund (IMF), the Bhutanese economy has grown substantially in the past decade. The IMF report says that the 9 th five year plan ( ) achieved success in reducing poverty, increasing the national income, improving social conditions, among others, in a smoothly conducted political transition. Real economic growth is estimated to have recovered from 5.7 % in Fiscal Year (FY) 2008/09 to 8.1 % in FY 2010/11. Growth falls to 3.9% in FY 2013/14 due to measures to correct imbalances in external sector. With accommodative fiscal measures and monetary policies, growth has recovered to 6.13% in FY 2014/15. In the last two years of 11 th FYP ( ), the growth is projected at an average of 6.5% with sound macro-fiscal policies. Industry & service sectors are the main driver accounting for 40% & 38% respectively for the growth. The growth in the industrial sector in Fiscal year 2010/11 kept pace with the average rate recorded in the past decade, but contribution of individual subsectors varied across the years. 2

3 The services sector in Fiscal Year 2010/11 also grew at the healthy average growth rate of around 8% in the past decade, with all subsectors growing strongly. While tourism contributes less than 1% of GDP, it is a key source of foreign exchange earnings. Although Bhutan was largely insulated from the global economic crisis, annual revenues from convertible-currency tourism fell to US$31.8 million in 2009, from US$38.8 million in Data from 2010 indicates sector recovery. The number of tourists to Bhutan in 2010 was 15% higher than in Tourism revenue recovered to US$35 million in 2010 due to improved global economic conditions. In the period Jan-April of 2011, the number of tourist arrivals and the revenues indicate a continued improvement in the tourism sector. Agriculture is characterized by low productivity for several reasons low levels of technology adoption, predominance of subsistence agriculture, small domestic market, inaccessibility to markets for agricultural products, and large tracts of fallow land. Reasons for fallow land include inability of farmers to protect crops from wildlife damage, distance of land from their homes, and lack of irrigation. Contribution of agriculture sector to GDP is declining as it was 13% in Fiscal Year and projected to be 11% at the end of 11FYP. Agriculture provides 56% of employment and 70% of population is dependent on agriculture for their livelihood. In the past few years, GDP growth decelerated from 11.7% in 2010 to 2.1% in 2013 in the aftermath of the Indian rupee shortage and then recovered to 6.5% in The investment rate of 56.8% of GDP is the highest in the world and has supported the growth rate, yet FDI remained at 1.7% of GDP less than half of the average of low- and middle-income countries. In the external sector, both exports and imports as a share of GDP are higher than the average. However, imports are much larger than exports, which have led to the current account deficit of 29.5%, one of the highest in the world. Net official development assistance relative to the size of the economy is similar to the global average, which is not enough to finance the current account deficit. Thus Gross Domestic Product of Bhutan was worth 2.3 billion USD for the year Employment Situation The labor force participation rate has increased from 62.6% in 2014 to 63.1% in 2015.There are higher labor force participations in the rural areas as compared to urban areas. This is mainly due to the fact that most of the people in the rural areas are engaged in subsistence farming. 3

4 Moreover the unemployment rate in rural are less (28%) compare to urban area (72%) as according to Labor Force Survey 2015 report, maximum youth are in urban area. In Bhutan the most vulnerable group on the unemployment category is the age groups between years which are mostly youths. The pattern of high unemployment in the early age groups indicates that these are the youths entering the labor market with certain level of education that are available for work or looking for work but lacks the required skills needed for immediate employment. Youth unemployment in urban areas is high and increasing: 21% in 2010, 23% in 2013, and 28% in 2015 and is considered one of the most important development challenges in Bhutan. Long lines for those seeking public sector employments and a scarcity of high-paying jobs for urban youth reflect a gap between supply and demand in the labor market. The country is therefore in urgent need of private sector development to diversify its economy, building on the foundation that the hydropower industry has created. The development of the private sector will also help address urban youth unemployment. However, according to the 2015 labor survey, the unemployment rate has declined to 2.5% in 2015 as compared to 2.6% in Consumer Price Index, Inflation and GDP Deflator Because of the exchange rate peg between Bhutan and India and India s large share of Bhutan s international trade, long-term inflation rates between the two countries are highly correlated. During the year , the rate of inflation was at 5% due to the rise in food and fuel prices. The inflation rate measured by consumer price index (CPI) decelerated in 2015 and The CPI (period average) slowed from 8.3% in 2014 to 4.5% in In the first 10 months of 2016, CPI inflation rates further eased to 3.0%. The disaggregation between food and nonfood shows that the inflation rates of both categories decelerated. Comparison of domestically produced and imported goods shows that imported goods have driven the decrease. Among the major categories, housing and utility prices and transport prices (fuel prices) started to fall in mid In the medium term, inflation is anticipated to remain low with the inflation targeting policy adopted by India. The Bhutan government has limited mechanisms to influence food prices. India supplies approximately 50 percent of Bhutan s requirements for rice. Indian rice is sold at much lower prices than Bhutanese rice, due to the lower production costs and higher productivity in India, and the strong preference of Bhutanese consumers for locally-produced rice. 4

5 Though Bhutan GDP deflator fluctuated substantially in recent years, it tended to increase through period. GDP deflator was in 2014 which increased to in In 2016 it further increased by 6.61% more which were Monetary policy: Macroeconomic conditions have improved since the slowdown brought about by the 2012 Indian Rupee shortages in the Bhutanese financial markets. However, in the balance of payments, the current account deficit continues to remain elevated at close to 30% of GDP and the Royal Monetary Authority (RMA) of Bhutan views the current account deficit as the biggest mediumterm challenge for the economy. Foreign currency reserves have been maintained in excess of the constitutional requirement. Additionally, the RMA s long-term reserve management strategy is now also aimed at proactively maintaining adequate liquidity buffers for Indian Rupee reserves at an internally determined level that has taken into consideration demand for Rupees over several years as well as anticipated needs over the medium-term. The renewed focus on reserve management is based on a twin-approach of efficiently and effectively managing existing reserves as well as providing incentives to encourage inflows, targeting in particular, inward remittances from non-resident Bhutanese as well as the earnings of exporters and FDI companies. Hydropower will remain an integral part of Bhutan s economy. Summary: Bhutan's economy, small and less developed, is based largely on hydropower, agriculture, and forestry. Bhutan has made progress in modernizing its economic structure and reducing poverty. The public and private sector has long been the main source of economic growth. In the last 3 years of 11 th FYP, average growth was 5.4%. Contribution of agriculture sector to GDP is declining and projected to be 11% at the end of 11 th FYP. GNI per capita increased to US$ 2,529 in FY 2014/15. Presently, overall unemployment rate is at 2.5% in Bhutan tracks Indian inflation as more than 80% of imports are from India. Inflation rate moderated to 3.22% in 2016 and GDP deflator was

6 Figure 1: Bhutan: Macro Poverty Outlook Indicators e 2016 f 2017 f 2018 f Real GDP growth at constant market prices Private consumption Government consumption Gross capital investment Exports, goods and services Imports, goods and services Real GDP growth at constant factor market prices Agriculture Industry Services Inflation (Consumer Price Index) Current account balance (percentage of GDP) Fiscal balance (percentage of GDP) Debt (percentage of GDP) Primary balance (percentage of GDP) Poverty rate ($1.90/day PPP terms)a Poverty rate ($3.10/day PPP terms) a Source: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice Note: e, estimate; f, forecast; PPP, purchasing power parity a. Calculations based on SARMD harmonization, using 2012 Bhutan Living Standards Survey b. Projection using natural distribution (2012) with pass-through =0.7 based on gross domestic product (GDP) per capita constant purchasing power parity c. Projections are from 2013 to Figure: 2 6

7 Figure: 3 Figure: 4 Figure 1.1: Gross Domestic Product of Bhutan Source: Asian Development Bank (2017) References: 13 th Round Table Meeting, Ministry of Finance, Royal Government of Bhutan. Macroeconomic Performance and Outlook. Asian Development Bank. (2017). Available at: CIA World Factbook (2016). Royal Monetary Authority of Bhutan. (2016). Monetary Policy Statement. World Bank. (2011). Bhutan Economic Update. Poverty Reduction and Economic Management South Asia Region. World Bank. (2016). Bhutan Economic Update 7

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