Bhutan to see real negative growth in 2014, 2015

Double digit inflation is pushing Bhutan's real growth to negative.
Double digit inflation is pushing Bhutan’s real growth to negative.

Asian Development Bank has projected real negative economic growth for Bhutan. The Asian Development Outlook 2014 projects that Bhutan’s economic growth for this year would be 6% while inflation would reach 10.2%.

The gap would be closer next year when growth picks up in construction industry. In 2015, growth is expected to be at 6.8% and inflation at 8.5%.

The report said, ‘growth slowed for a second year as the authorities continued administrative measures to rein in consumption spending that was creating pressures on the balance of payments and Indian rupee reserves.’

The measures to address the rupee shortage ‘entailed credit and import restrictions, particularly in import-heavy activities such as construction and transport that required large rupee payments.’

GDP growth is expected to rebound to 6% in 2014 from 5.3% in 2013 as hydropower construction projects under the Eleventh Five-Year Plan get underway and improving economic conditions in major tourist source countries boost tourism. Growth in 2015 is forecast to strengthen as hydropower construction expands and exports increase with the start of operations at the Dagachhu power plant.

Total budget spending is planned to moderate in 2014 in line with the government’s policy to rationalise expenditure, but the deficit is nevertheless expected to widen to 3.6% of GDP on lower projected grants. The reduction in spending reflects spending cuts on vehicle purchases, staff quarters construction, and other nonessential operating expenses, as part of austerity measures to address the rupee liquidity problem. Moreover, medium-term macro-fiscal projections envisage annual expenditure ceilings to maintain a sustainable fiscal path.

The current account deficit is projected to widen to 28.6% of GDP this year, mainly owing to large imports for power projects, but to narrow again to 26.4% next year with the mobilisation of more development grants.

Productivity gains have been largely confined to industry, which has improved productivity by over threefold in the past 13 years but uses little labor. Productivity increases in the key employment generating sectors have, by contrast, been negligible. As 62% of the Bhutanese work in agriculture, mainly for subsistence, encouraging private-sector development to create more jobs outside of agriculture remains an important macroeconomic priority toward achieving self-sufficient and inclusive growth. In terms of business development, the greatest constraint identified by small and medium-sized firms is their lack of access to finance.

ADB has suggested that constraints on domestic credit to the private sector need to be addressed. Further development of a credit information system and a better variety of financial products may also help bolster the provision of credit to entrepreneurs, the report says.

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