Macro-economic challenges in the medium term

FY 2013-14, economy is projected to grow at 7.1%, which will be driven mainly by industry and service sector

The Finance Ministry’s (MoF) National Budget Report for the Financial Year (FY) 2013-2014 states macro-economic outlook in the medium term is based on the macro-fiscal projections of the Macroeconomics Framework Coordination Committee (MFCC) which comprises of key economic agencies.

It presents an overall outlook of the Bhutanese economy and highlights the key challenges over the medium term.

Economic Growth

According to budget report, the economy is projected to grow at 7.1%, which will be mainly driven by industry with 6.4 % and service sectors with 9.3%. For the FY 2014-15, the growth projection is 6.9% and FY 2015-16 is 6.8% followed by growth in the agriculture sector at 1.8%.

The average growth for the 11th five year plan (FYP) is estimated to be above 10% due to commissioning of the three mega hydropower projects and expected commencement of the construction of the remaining hydropower projects under the accelerated hydro power development initiative.

In the medium term, the economy is projected to grow at an average of 6.9% driven by high level of investment in hydropower projects and expansion in the service sector.

The construction of current and pipeline hydropower projects will continue to be the major drivers of growth. With the commissioning of Dagachhu hydropower project and Dungsum Cement project in FY 2013-14, the industry sector is projected to grow at 6.2%. Similarly, the growth of 9% in the service sector is expected to be fuelled by investments in hotel & restaurant at 16.9%, finance at 10.9% and transport and communications at 9.3%.

The implementation of the new government’s Economic Stimulus Plan (ESP) is expected to further boost the economic growth.

Consumption and Investment

As per National Statistical Bureau (NSB), consumption is projected to grow from 1.2% in FY 2012-13 to 6.9% in FY 2013-14. The overall consumption is expected to grow over the medium term mainly with increase in private expenditure at 7.5% and government expenses at 6.6%.

Gross capital formation is estimated to decline from 6.2% in FY 2012-13 to 4.1% in FY 2013-14 due to fall in government investment or capital expenditure being the first year of the current FYP.

The implementation of the remaining hydropower projects to achieve the target of 10,000 MW during the 11th FYP will fuel the private sector consumption. Further, the ESP will induce investment and consumption.


NSB stats shows inflation was recorded at 8.4% due to increase in prices of food and non-food items during the first quarter of this year.

The domestic inflation trend followed the price movements in India, since more than 75% of goods and services are imported from India. In the medium term too, the same trend is anticipated.

Domestic Revenue

Domestic revenue is projected to grow on an average of 6% with tax revenue and non-tax revenue at 5.9% and 6.8% respectively in the medium term. With commissioning of the Dungsum Cement project and Dagachhu hydropower project during the FY, it is expected to contribute to the growth in overall revenue.

The domestic revenue projection will be revised based on the impact of any new fiscal measures that the Parliament may consider in the medium term.

External Grant Assistance

For the FY 2013-14, the external grant is estimated at NU 8,109.513mn representing about 27% of the total resources and financing about 47% of capital expenditure. For the two outer years, grants are projected at Nu. 11,894.227mn and Nu. 11, 895.846mn respectively based on the proposed activities in 11th FYP. The estimated external grants will be revised as soon as donor assistance for FYP is confirmed.


For the FY 2013-14, the total expenditure is estimated at NU 36,113.865mn, which is about 31.7% of gross domestic product (GDP).

For the next two FYs, the government expenditure is estimated at 32.6% and 30.4% of GDP. In the medium term, the average annual growth of government expenditure is estimated at 10%.

Fiscal Balance

The fiscal deficit for the FY is estimated at 3.7% of GDP. In the medium term, the fiscal deficit is projected to be 3.1% of GDP in the next FY and 3.0% in FY 2015-16. The average fiscal deficit for the plan period is projected to remain within the target of 3% of GDP.

External Debt

For the current FY, external debt outstanding is estimated at Nu. 110,399.103mn, which is about 97.2% of the estimated GDP. The increase in external debt stock during the year will be about 15.6% due to disbursements for the three ongoing hydropower projects and start of other projects in the pipeline.

Of the total external debt, 67.4% is on account of hydropower debt and the balance 32.6% is for social infrastructure such as rural electrification, roads, urban, rural telecommunication, education, and irrigation.

In the medium term, the external debt to GDP ratio is projected to be 112.9% in 2014-15 and 125.5% in 2015-16.

During the next FY, with the repayment of Government of India (GoI) standby credit of INR 3bn within March, 2014 and currency SWAP arrangement of Nu. 5.409bn as of September, 2013, the total debt-service ratio will be 32%.

Domestic Debt

The domestic debt stock will be about Nu. 350.605mn for the current FY which will be availed for the purchase of an aircraft for Druk Air.

Domestic debt stock may also increase due to issuance of treasury bills for cash flow management until its redemption, issuance of government bonds for financing the infrastructure projects and financing the resource gap through internal borrowing.

Balance of Payments (BoP)

Over the current FY, the current account deficit is projected to widen at Nu. 33.77bn mainly with increase in trade deficit and decline in current transfers. With the repayment of GoI standby credit facility (SCF) of Nu. 3bn and currency swap arrangement of Nu. 5.4bn, the overall balance of payments is projected at negative Nu. 4.8bn for the period.

However, in the outer two years, the overall BoP will be in surplus with increase in capital and financial flows despite the rapid growth in current account deficit. For the next FY, current account deficit as percentage of GDP is projected at 28.6% and 33.2% in FY 2015-16 due to increasing imports mainly for hydropower projects.

Balance of Payments (BoP) with India

On BoP with India, the trade deficit is projected at 17.6% of GDP in the next FY and 18.7% of GDP in FY 2014-15, but in the following year it is projected to further worsen to 21.7% of GDP mainly due to an expansion in merchandise imports on account of the construction of hydro power projects. With the widening of the trade deficit, the current account deficit with India is projected to grow from 25.8% of GDP in the next FY to about 29.3% of GDP at the end of FY 2015-16.

Foreign Exchange Reserves

Overall reserve position is expected to improve in the medium term due to increasing exports with the commissioning of Dagachhu hydropower project and Dungsum Cement project. According to the central bank, the gross international reserve is projected at USD 768.8mn in the current FY and USD 809.6mn in the next FY, adequate to meet 23 months of essential imports respectively. The constitutional requirement is 12 months.

The Budget has been formulated within the budget policy and fiscal framework statement (BPFFS) that has been prepared by MFCC. The MFCC comprises of the members from the Key economic agencies of the government responsible for macro-fiscal projections for determining the fiscal path.

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