The Bhutanese Leading the way.
Stronger 2025 performance, delayed hydropower projects and rising import demand shape economic outlook
Bhutan’s economic growth projection for 2026 has been revised downward to 6.21 percent from 6.31 percent in the previous quarter, according to the Ministry of Finance (MoF)’s Fourth Quarter Update for FY 2025–2026.
The revision follows stronger-than-expected growth of 8.52 percent in 2025, with the higher base making a similar pace of expansion more difficult to achieve this year. A marginal reduction in projected electricity generation due to delays in commissioning some small hydropower projects also contributed to the revision.
Despite the downward adjustment, the medium-term outlook remains positive, with growth projections for 2027 and the outer years revised upward as increased energy-related construction and private investment are expected to drive activity.
The economy’s 8.52 percent growth in 2025 was driven by strong performance in electricity generation, construction, finance and insurance, and communications. The commissioning of Punatshangchhu II, renewed private construction following the lifting of the housing loan moratorium, and increased public and hydropower investment were key contributors.
Electricity generation rose sharply during the fourth quarter of FY 2025–2026, from 1,448.22 GWh in the third quarter to 3,873.45 GWh. Generation in the latest quarter was 7 percent higher than the same period a year earlier, supported by additional output from the Burganchhu and Yungichhu small hydropower plants.
Electricity generation is expected to peak at around 7,638 GWh in the first quarter of FY 2026–2027. However, overall generation projections for 2026 to 2028 have been revised downward because of slower-than-expected progress in energy infrastructure development.
Construction is expected to remain a major driver of growth as major hydropower projects enter their construction phase. Private investment is projected to rise from 52 percent in 2025 to 57 percent in 2026, and further to 65 percent by 2028, largely supported by energy-related projects.
The investment cycle, however, will also increase import demand. The net export deficit is projected to widen from around 24 percent of GDP in 2026 to 30 percent by 2028.
Tourism is expected to provide another source of growth. Tourist arrivals in the fourth quarter of FY 2025–2026 were 56 percent higher than projected in the previous quarter. Indian arrivals increased by 65 percent year-on-year as Bhutan absorbed displaced regional travel demand, while arrivals from other countries declined by 3 percent.
The ministry expects continued growth in tourism, supported by improved air connectivity, including the restoration of Bangkok services through Guwahati and an additional weekly Singapore service by Drukair. However, geopolitical tensions and high airfares remain risks, particularly for long-haul markets.
Inflation and fiscal position
Inflation remains a concern. Average headline inflation during the first half of 2026 stood at 6.45 percent, compared with 3.51 percent in 2025. The increase was initially driven by the introduction of the Goods and Services Tax in January and February and was later compounded by global fuel price shocks and higher imported food costs.
Inflation is expected to remain elevated at around 7 percent in the first quarter of FY 2026–2027.
The fiscal deficit is projected at 6.41 percent of GDP for FY 2026–2027, slightly lower than the previous quarter’s projection because of higher external grants, estimated at Nu 1.09 billion above the approved budget.
Over the medium term, the deficit is expected to remain elevated due to higher expenditure requirements and priority projects under the 13th Five-Year Plan. Nevertheless, the cumulative fiscal deficit is projected to remain broadly consistent with the government’s 3 percent of GDP target.
For FY 2025–2026, the overall fiscal position remained favourable, with the annual deficit estimated at just 0.38 percent of GDP. However, the fourth-quarter deficit widened to 1.76 percent of GDP from 0.93 percent in the previous quarter as expenditure increased sharply toward the end of the financial year.
Revenue rose from Nu 20.6 billion to Nu 39.5 billion between the third and fourth quarters, while expenditure increased from Nu 23.7 billion to Nu 45.4 billion.
External pressures increase
The current account deficit is expected to widen significantly to 23.4 percent of GDP in FY 2026–2027 from an earlier projection of 16.7 percent.
The deterioration is expected to result from higher imports linked to investment and consumption, lower non-hydropower export receipts and moderating remittance inflows.
For FY 2025–2026, the current account deficit was revised downward to Nu 65.5 billion, or 19.4 percent of GDP, from the previous estimate of 20.1 percent. The improvement reflected lower electricity imports, stronger interest earnings and higher remittance inflows.
Remittances reached Nu 37.8 billion during FY 2025–2026, although inflows are expected to moderate as exceptional GMC-related transfers decline. Inward remittances fell from USD 33 million in May to USD 19 million in June 2026.
Foreign exchange reserves stood at USD 1.2 billion at the end of June, higher than the previous projection of USD 1.1 billion. However, reserves are expected to decline to USD 1.16 billion in FY 2026–2027 and eventually to USD 945 million by FY 2028–2029 as imports rise.
Despite the projected decline, reserves are expected to remain above the normal threshold of USD 603 million and the critical threshold of USD 464 million.
Credit and employment
Credit is expected to continue supporting economic activity, although growth is moderating. Sectoral credit is projected to expand by 8.82 percent year-on-year in FY 2025–2026, with housing, hotel and tourism, and manufacturing accounting for around 55 percent of the credit portfolio.
Medium-term credit growth is projected to remain between 5.43 percent and 8.82 percent.
The labour market has also improved. The unemployment rate fell from 3.2 percent in the third quarter to 2.7 percent in the fourth quarter of 2026.
According to the Bhutan Labour Market Information System, 8,099 jobs were created in 2025. During the first half of 2026, another 3,640 jobs were created, with 1,845 jobs in the first quarter and 1,795 in the second.
Debt remains high
Bhutan’s public debt remains elevated, largely because of hydropower borrowing, but the debt-to-GDP ratio has declined.
Total public debt stood at 105.2 percent of GDP at the end of June 2026, down from 107.7 percent in the third quarter. For FY 2026–2027, public debt is projected at 102.23 percent of GDP and is expected to average around 103 percent over the outer years.
The high debt burden continues to reflect the capital-intensive nature of hydropower investment and associated external financing requirements. However, central government debt is projected to remain within the 55 percent of GDP threshold.
Overall, the latest update points to an economy entering a new investment cycle. While the exceptionally strong growth recorded in 2025 is unlikely to be repeated, hydropower construction, rising private investment and resilient tourism are expected to sustain growth.
The main risks will be managing inflation, rising imports, a widening current account deficit and declining foreign exchange reserves while ensuring that the next phase of energy investment translates into broader and sustainable economic growth.
