Regions and Countries

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p. 4 of 4 BACK | NEXT Executive Summary I. Recent Economic Developments II. Development Challenges III. Risks and Vulnerabilities

Country Economic Review: Bhutan

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III. Risks and Vulnerabilities

34. The major risk facing Bhutan is its current high dependence on the one-country-one commodity framework. India is Bhutan's largest trading partner and an important source of development financing. Hydroelectric power sales, 90% of these to India, remain Bhutan’s single largest source of revenues. Trade and informal currency union with India have many advantages. They have ensured Bhutan a safe and steady stream of revenues from its hydroelectric power exports. At the same time, the one-to-one currency peg between the Indian rupee and Bhutanese ngultrum has enabled Bhutan to benefit from the price stability prevailing in India over the past few years. However, it also means that Bhutan remains vulnerable to developments across its southern border.

35. Bhutan is faced with two problems that have security implications for the country. One is people in camps in eastern Nepal. To find an early and durable solution to the problem bilateral discussions are continuing between Bhutan and Nepal. This issue is expected to be resolved in the near future. The other issue relates to the presence of armed militant groups from India who have taken shelter in the dense jungles of southern Bhutan. The Government is making efforts to get the militant groups to leave the country peacefully. Until they are resolved, these issues could cast a shadow on Bhutan’s development progress.

36. A small and narrow economic base is also a risk factor. Bhutan must use the existing window of opportunity to expand its economic base by focusing on much-needed efficiency improvements in its financial sector and by resolving the existing shortages of a skilled domestic labor force.

37. While Bhutan has made important strides in social development and remains well on track for achieving MDGs, preliminary findings have revealed a 29% poverty rate in rural areas, home to about 80% of Bhutanese. Broad-based equitable economic growth can lead to a decline in the incidence of poverty, but would require that development programs be so structured that the rural population equally benefits. Development of necessary infrastructure for marketing links would be vital for the support of income-generating small and micro enterprises established in rural areas.

38. The NYFP contains a comprehensive framework for Bhutan’s development. At the same time, the financing of the NFYP may pose some difficulties, thus necessitating either an increase in domestic borrowings, which in recent years have averaged about 2% of GDP, or scaling back the development program. Currently, the Nu70 billion NFYP has a resource gap equivalent to 19% of the total plan outlay. The closing of this financing gap is based on the assumption that Bhutan would continue to benefit from concessional external assistance for financing the bulk of its development programs. Given the evolving global geopolitical situation and economic slowdown, there is a theoretical chance that the quantum of external funding may decline in the future. Thus, Bhutan needs to rely more on domestic resources to progressively increase the domestic financing share of the development budget.

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