Catalog

	Table of Contents
p. 27 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : South Asia

---

Bhutan

Close ties to India helped protect Bhutan from the slowdown of the global economy in 2001. The country’s medium-term prospects are good, provided that the Government achieves greater fiscal discipline. Construction of hydropower plants and power exports to India will continue to play a key role in GDP growth.

Macroeconomic Assessment

Economic activity, vigorous for the past few years, was robust in 2001 when GDP grew by 6.5%, compared with 6% during the 1990s and 5.7% in 2000 (Figure 2.15). The economy’s close ties to India helped Bhutan avoid the direct impact of the global economic slowdown, though the main driving force behind economic growth was, in fact, the construction of hydropower plants to serve the Indian market. Accordingly, the industry sector grew by 8%, despite a disappointing performance by mining and manufacturing. The services sector grew by 6.3%, buoyed by the transport and communications subsectors. However, tourism, which registered double-digit growth in the 1990s, performed poorly as a result of slower tourist arrivals following the events of September 11th, poor weather conditions earlier in the year, and logistics difficulties with air transport from overseas. Agriculture, traditionally the slowest sector, stayed at 4.8% growth due to stable livestock production and to strong forestry output offsetting disappointing crop production and exports of fruits and horticultural products.

The fiscal deficit expanded to 5.1% of GDP in 2001 from 4.1% in the previous year because of increased capital investments on large projects, including a housing project, an expressway project, and a renovation project for a former capital city. Broad money supply growth decelerated to 5.5% from 21.4% in 2000, reflecting a deceleration of external assistance, which has a direct impact on money creation. Inflation has traditionally run in parallel to inflationary trends in India in view of the porous nature of the border with that country, and the existence of the ngultrum-Indian rupee peg. As measured by the consumer price index, inflation fell substantially in 2000 and remained low at 3.6% in 2001, largely due to declines in food prices. Interest rates also fell, reflecting low domestic inflation.

The trade account deficit increased from 16.7% of GDP in 2000 to 22.6% in 2001. However, the improvement of services and transfers helped narrow the current account deficit from 30.6% of GDP in 2000 to 27.5% in 2001. Capital inflows in the form of grants and loans, primarily to fund the power sector, consome margin, despite the lack of FDI. Grants, having surged in 2000, returned to the 1999 level in 2001, while the volume of loans increased. The net effect was to keep foreign exchange reserves at a level equivalent to 16 months of merchandise imports. In 2001, India accounted for 94% and 74% of total exports and imports, respectively, and 70% of total grants and loans. Total external debt increased by 37%, largely in response to loans from India for the new hydropower projects. The debt service ratio declined marginally from 5.7% of GDP in 2000 to 5.6% of merchandise exports in 2001.

Policy Developments

The Government used to pursue a prudent fiscal policy, maintaining current expenditures at a level that could be completely financed by domestic revenues. However, the fiscal deficit rose steeply in recent years and reached over 5% in 2001, though some favorable factors are expected to mitigate the fiscal constraints. These include the fact that domestic revenues will probably strengthen as a result of the commissioning of major hydropower plants over the coming months, the likely upward revision of power export tariffs, and the introduction of a personal income tax this year.

Given that monetary policy has to be geared to supporting the exchange rate peg with the Indian rupee, inflation and interest rates have to be kept in line with those in India and therefore the scope of monetary policy is substantially limited.

A high level of excess reserves in the banking system persisted for many years. It was regarded as the result of the banks’ low capacity for selective lending and the lack of domestic investment opportunities that are, in turn, due to the weakness of the private sector. The overall situation with respect to strengthening the domestic banking system is being addressed with assistance from ADB and IMF.

Outlook for 2002-2003

Bhutan’s medium-term economic prospects are good. Beginning this year, the Government will pursue a policy of maximizing “gross national happiness”. This balances growth in GDP with environmental and cultural protection as laid out in the Ninth Five-Year Plan (2002–2006). Such a strategy could, though, make it difficult to achieve very rapid economic growth. The Government will also move toward a holistic approach to development and poverty reduction, with a greater focus on those living in rural areas. The economy is, other than tourism, relatively well insulated from the direct effects of global economic volatility, although it is vulnerable to the effects of major developments in India.

GDP growth of 6–7% a year over the medium term can be achieved, in particular if hydropower generation and power exports come on line as scheduled. The prospects for agriculture largely depend on the Government’s decentralization drive initiated under the Ninth Five-Year Plan, starting in July 2002, as well as the development of domestic and external markets for farm products. Electricity and related construction will continue to boost the industry sector, while private sector development will determine the prospects for mining and manufacturing. The services sector will also benefit from an expected recovery in tourism.

It is projected that the Government will manage fiscal policy prudently, and that the overall fiscal deficit will be confined to about 3% of GDP. Monetary conditions are expected to remain more or less unchanged. Inflation will continue to reflect Indian price movements primarily, rather than domestic conditions, and is expected to remain moderate.

Despite generally good medium-term prospects, however, risks could arise from both external and internal forces. If India’s fiscal situation worsens, hydropower projects could be delayed. Given the importance of external finance to Bhutan’s development plans, it is important to maintain the flow of resources, since a reduction in these flows could reduce the development plan implementation rate and the Government’s financial room for maneuver. Of more significance, perhaps, are the risks of not achieving rising living standards and adequate job creation, which could lead to growing unemployment.

Back Bangladesh	Next India