IMF Executive Board Concludes 2022 Article IV Consultation with Bhutan

May 24, 2022

Washington, DC: On May 13, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Bhutan.

Prior to the pandemic, Bhutan had made significant strides in improving per capita income and reducing poverty, qualifying for its graduation from the Least Developed Country (LDC) status in 2023. The pandemic has had a substantial impact on the economy. Real GDP contracted for two fiscal years, with contact‑intensive and externally oriented sectors most affected. The wide‑ranging policy responses, aided by Bhutan’s impressive vaccination campaign, helped mitigate adverse impact on lives and livelihoods. The responses included the deployment of the National Resilience Fund, the Economic Contingency Plan, and a series of fiscal, monetary, financial, and labor market measures.

While the pandemic and the war in Ukraine are weighing on the near‑term outlook, medium term growth is expected to be driven by a recovery in services, manufacturing, and hydropower. Growth is projected at 4.4 percent in FY2021/22, with the negative impacts from the Omicron outbreak and higher commodity prices partly offset by higher electricity exports, ongoing policy support, and base effects. Inflation is projected to remain elevated in FY2021/22, owing also to higher commodity prices and supply disruptions. Over the medium term, hydropower generation capacity is expected to double, supporting growth, the current account balance, and the fiscal position. Inflation is projected to remain in line with that in India, Bhutan’s key trading partner, given the ngultrum’s peg to the rupee. The fiscal deficit is expected to moderate as pandemic‑related measures are gradually phased out and revenue reforms deepen. The current account deficit and reserve coverage are expected to improve from declining hydropower‑related imports and rising hydropower exports.

Uncertainty around the economic outlook is elevated, with the balance of risks tilted to the downside. External risks include a sharper‑than‑expected global slowdown and/or a slowdown in India, including from future pandemic waves, an intensification of geopolitical tensions, and a slow recovery in tourism. Domestic risks stem from pandemic‑related uncertainties , elevated financial sector strains amid limited fiscal space and delays in hydro projects , which would affect growth, external buffers, and debt dynamics. That said, recent increases in hydropower production and remittances have supported reserves.

Executive Board Assessment [2]

Executive Directors commended the authorities’ response to the pandemic, which included Bhutan’s record setting vaccination campaign, and wide ranging policy measures. These measures have helped mitigate adverse impact of the pandemic on lives and livelihoods.

Directors agreed that fiscal policy has appropriately supported the pandemic and recovery efforts. A gradual medium‑term consolidation, underpinned by revenue mobilization, would be important amid higher debt levels and limited fiscal space. They encouraged the authorities to further develop a domestic bond market, which would support stable and longer term funding, and increase supply of risk free assets. Directors welcomed the authorities’ efforts in broadening the revenue base, including the planned introduction of the Goods and Services Tax.

Directors noted that monetary policy has been appropriately accommodative but should be gradually normalized as the recovery takes hold, amid rising inflationary pressures. They welcomed efforts by the Royal Monetary Authority to modernize the monetary policy framework by introducing a Domestic Liquidity Management Framework. Further reforms, including in the liquidity management framework and digitalization, would support market development.

Directors highlighted the need to address risks in the banking sector while supporting the economic recovery. They agreed that a well‑communicated plan for withdrawing broad based policy support would be warranted, as activities gradually normalize. Directors welcomed the authorities’ progress in implementing a risk based supervisory framework, and emphasized the importance of monitoring cash flows, assessing corporate viability, and a steadfast implementation of the new NPL resolution framework.

Directors agreed that the exchange rate peg to the Indian rupee has served Bhutan well and remains an appropriate nominal anchor. Directors welcomed the recent steps to remove some foreign exchange restrictions and encouraged elimination of the remaining restrictions as soon as macroeconomic conditions allow.

Directors acknowledged that the post-pandemic recovery offers an opportunity to lay the groundwork for a shift towards greater diversification and a knowledge-based economy. They agreed that continued improvements in physical and digital infrastructure should help support Bhutan’s development goals and economic transformation and further progress with improving access to finance remains crucial. Directors welcomed the authorities’ plan for climate change adoption and further greening of energy sources.


Table 1. Bhutan: Selected Economic and Financial Indicators, 2017-23

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

Est.

Proj.

Proj.

(In percent of GDP, unless otherwise indicated)

National Accounts

Nominal GDP (in millions of ngultrum)

163,456

172,951

175,067

176,671

196,161

217,004

Real GDP growth (percent change)

3.8

4.4

-2.4

-3.7

4.4

4.5

Prices

Consumer Prices (EoP; percent change)

2.5

2.7

4.5

9.0

6.5

5.1

Consumer Prices (avg; percent change)

3.7

2.8

4.2

8.2

7.9

5.4

General government accounts

Total revenue and grants

31.9

24.3

31.2

33.8

28.7

24.1

Domestic Revenue

22.6

20.1

20.7

20.3

17.5

19.8

Tax revenue

16.6

15.7

13.0

11.7

11.8

13.8

Non-tax revenue

6.0

4.4

7.7

8.6

5.7

6.0

Foreign Grants

9.1

6.1

9.4

8.4

10.8

4.3

Total expenditure /1

33.5

25.9

33.1

40.1

38.8

31.7

Current expenditure

16.8

16.1

21.7

24.6

20.7

17.8

Capital expenditure

17.6

9.4

12.6

15.6

18.2

13.9

Primary expenditure /1

33.1

24.5

33.8

39.2

37.5

30.1

Primary balance

-0.3

-0.7

-1.5

-5.3

-8.8

-6.0

Fiscal balance

-1.6

-1.6

-1.9

-6.3

-10.2

-7.7

Interest

1.3

0.9

0.5

1.1

1.4

1.6

General government debt 2/

113

106

131

135

133

131

Domestic

5

3

9

10

6

6

External

108

104

122

125

127

125

Monetary sector

Broad money (M2) growth (percent change)

10.4

5.6

19.3

24.4

8.8

0.6

Private Credit to GDP ratio

53.2

60.6

67.9

71.6

69.9

71.0

Private credit growth (percent change)

15.7

20.5

13.3

6.5

8.3

12.5

Balance of payments

Current account balance

18.4

-20.5

-12.4

-11.8

-10.6

-9.7

Goods balance

16.6

-16.4

-10.0

-7.1

-9.6

-7.3

Hydropower exports

6.8

6.4

13.0

14.8

14.4

15.9

Non-hydropower exports

17.2

18.5

13.9

15.3

14.9

14.5

Imports

40.6

41.2

36.9

37.2

39.0

37.8

Services balance

-1.4

-2.1

-2.9

-4.8

-4.8

-3.4

Primary income

-8.4

-9.0

-6.6

-5.7

-6.4

-5.1

Secondary income

8.1

7.0

7.1

5.9

10.3

6.1

Capital account balance

7.3

5.1

5.9

3.7

7.7

4.4

Financial account balance

17.2

-14.7

-21.0

-21.5

-14.3

-11.1

Net errors and emissions

19.4

-0.1

-2.3

-13.4

0.0

0.0

Overall balance

25.4

-0.8

12.2

-3.5

11.5

5.8

Gross official reserves (in USD millions)

1111

1345

1344

1558

1844

1977

(In months of goods imports)

13.1

16.0

18.1

21.0

21.4

21.8

(In months of goods and services imports)

10.7

13.1

14.7

18.2

18.7

19.3

Sources: Bhutanese authorities; and Fund staff projections.

1/ The expenditure for FY2020/21 and FY2021/22 includes an estimated amount for income support provided to individuals and loan interest payment support to borrowers financed by the National Resilience Fund.

2/ Public and publicly guaranteed debt, including loans for hydropower projects.



[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.

[2] 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 summing up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .

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