The Bhutanese Leading the way.
Bhutan’s projected GDP growth for Financial Year (FY) 2025/26 has been revised downward by 0.2 percentage points from pre-conflict estimates, assuming an average Brent crude price of USD 94 per barrel in calendar year 2026, according to the World Bank’s Bhutan Development Update.
On the supply side, growth projections for industry and tourism have been lowered, while on the demand side, private consumption, imports, and investment are expected to grow more slowly.
The Middle East conflict poses risks to Bhutan’s economic stability, with disruptions in the Strait of Hormuz, a critical global energy shipping route through which roughly 20 percent of the world’s petroleum and liquefied natural gas supplies pass, triggering surging energy prices. Shipping disruptions, insurance withdrawals, and damage to production facilities have intensified price pressures, exposing Bhutan to higher oil costs and potential disruptions to tourism and trade
Inflation is also expected to rise, with the Consumer Price Index (CPI) projected at 5.2 percent in FY2025/26 and 5.6 percent in FY2026/27, driven primarily by higher food and fuel prices. Additional inflationary pressure, estimated at 0.5 percentage points, stems from increased fuel prices due to the Middle East conflict.
Although the government introduced the National Fuel Price Smoothing Framework (NFPSF) on 21st March 2026, prolonged oil price increases could further elevate inflation, dampen economic growth, and constrain household consumption.
According to the latest Bhutan Development Update 2026 by the World Bank, Bhutan’s economy is nevertheless expected to sustain strong growth, driven by hydropower development and capital investment.
Bhutan’s real gross domestic product (GDP) is projected to grow at 7.1 percent in FY2025/26 and 6.4 percent in FY2026/27, following an 8.1 percent expansion in FY2024/25. Growth will be supported by the full commissioning of the Puna hydropower project and the ongoing construction of the Dorjilung and Khorlochhu hydropower plants, although the services sector is expected to grow more slowly. On the demand side, private investment in hydropower, public investment under the 13th Five-Year Plan (FYP), and hydropower exports are expected to drive growth.
Despite this outlook, rising youth unemployment and emigration remain key concerns. While the overall unemployment rate stood at 3.8 percent in the fourth quarter of 2025, youth unemployment rose to 20.6 percent, marking a 2.9 percentage point increase from the same period in 2024. Limited quality job opportunities and significant wage differentials compared to overseas employment have contributed to the emigration of about 9 percent of Bhutan’s population in 2025, particularly highly skilled youth.
On the external front, Bhutan’s current account deficit (CAD) is expected to remain elevated at around 20 percent of GDP over the medium term, driven by increased imports related to hydropower construction. These deficits are projected to be financed through external grants, foreign direct investment (FDI), external loans, inward remittances, and repayments of foreign currency bonds. Gross international reserves are expected to rise to USD 1.3 billion by June 2026, equivalent to 7 months of imports.
Fiscal pressures are also expected to increase, with the fiscal deficit projected to widen to 3.7 percent of GDP in FY2025/26 from 2.6 percent in FY2024/25, due to lower tax revenues and higher capital expenditure. While revenue from the Goods and Services Tax (GST) is expected to increase, it will be offset in the short to medium term by reductions in corporate and personal income tax rates. Over the long term, these growth-oriented tax reforms are expected to stimulate private investment and consumption, leading to stronger revenue growth.
Capital expenditure is expected to rise due to investments under the 13th FYP, while the fiscal deficit has been revised upward by 0.4 percentage points due to fuel subsidies introduced in March and April 2026.
Public and publicly guaranteed debt is projected to reach 112.4 percent of GDP by the end of FY2025/26, with Bhutan’s risk of debt distress assessed as moderate under the 2025 joint Bank-Fund Debt Sustainability Analysis.
In the financial sector, recent reforms targeting non-performing loans (NPLs) aim to strengthen long-term stability. However, near-term risks remain, with NPLs, including write-offs, standing at 7.2 percent of total loans as of January 2026. As COVID-19-related forbearance measures are phased out, underlying asset quality issues may become more visible, potentially increasing reported NPLs and weighing on bank balance sheets.
Poverty is projected to continue declining, with extreme poverty (Nu 277 per day) nearly eradicated. The poverty rate at the upper middle-income threshold (Nu 767 per day) is expected to fall to 5.1 percent in 2026 and 4.5 percent in 2027, although progress remains uneven across regions. While GST amendments are expected to lower indirect tax burdens, external shocks and climate-related risks could slow poverty reduction, alongside limited job creation in the private sector.
The report stated that Bhutan’s economic outlook is subject to both downside and upside risks. Domestic risks include delays in hydropower projects, weaker-than-expected tax revenues, and financial sector vulnerabilities, while external risks stem from the prolonged Middle East conflict and climate change. The economic demarcation between the Gelephu Mindfulness City (GMC) project and the rest of the country presents both a risk management challenge and an opportunity for private sector growth.
To support sustainable growth, the report outlines four key policy priorities: promoting job creation by maximizing indirect employment from hydropower and improving working conditions, particularly for women and youth; strengthening fiscal and debt management through improved public investment efficiency and enhanced donor coordination; fostering financial and private sector development by addressing NPLs, reviewing bank asset quality, promoting FDI, and improving access to finance for small businesses; and strengthening monitoring systems to better target public spending and respond effectively to external shocks while protecting vulnerable populations.
