95993 2007 to 2012 poverty measured at PPP $2.5/ day decreased from 42.8% to 24.9% or 2.6 BHUTAN Recent developments percentage points per year. Since then, pro- jections based on GDP elasticity, estimate GDP growth in 2014 is estimated to 5.7 poverty to have decreased at 0.9 percentage percent, after reaching a bottom low 2.05 points per year with a headcount rate of 2014 percent in 2013. Restrictions on credit, for- 23.0% by 2014. Inequality measured by the eign exchange and imports put in place in Gini coefficient of consumption, has barely Population, m 0.75 2013 to address the shortage of Indian Ru- changed from 0.381 in 2007 to 0.387 in 2012 GDP, US$, bn 1.78 pees were replaced in mid-2014 by market and is not expected to change in the near GDP per Capita, US$ 2,400 friendly measures on credit and higher future. GDP per Capita, US$ PPP 6,920 Poverty rate, US$1.251 2.1 taxes. Additional drivers of growth in 2014 The fiscal deficit in FY14/15 is estimated to Poverty rate, US$2.501 23.0 include hydropower construction back on 2.2 percent of GDP. Civil service wages and Gini coefficient, consumption2 0.381 track after geological delays, the five-year allowances were increased by 19 to 23 per- Life expectancy 68 plan implementation in full swing and a cent respectively but the impact on spend- School enrolment rate, primary3 112 record level of tourists due to promotions. ing is expected to be offset by a reduction On the demand side, public consumption in other expenditures. Domestic revenues Sources: National Bureau of Statistics, Bhutan, World Development Indicators, 2014 . boosted by an increase in wages is estimat- as a share of GDP have declined over the 1/ 2014 projections, WB staff estimates based on GDP growth ed to have grown by 22.6 percent. Growth last three years, from 22 percent to an esti- elasticity approach. 2/ World Bank staff estimate based on 2012 BLSS. of gross capital fixed investment is estimat- mate of 18.9 percent in FY14/15, while 3/ Gross school enrollment, primary, 2012, Ministry of Educa- ed to 2.7 percent, masking a larger incre- grants finance about 27 percent of the tion, Bhutan ment in the hydropower sector. Export budget, 70 percent of which is from India. earnings grew at 6.2 percent, supported by Bhutan’s public and publicly guaranteed tourism expansion, but outpaced by rapid external debt stood at 95 percent of GDP by Growth rebounded in 2014 along with the import growth (18.6 percent). end-2014, two thirds of which are from lift of restrictions over credit and imports Increasing youth unemployment, queuing commercially profitable hydro projects. and with hydropower investment back on for public-sector jobs, widespread infor- Domestic debt is limited to 5 percent of mality and high reservation wages point to GDP. schedule. Bhutan’s significant dissaving significant mismatches in the labor market. Bhutan runs a growing current account is illustrated by a large current account Whereas in 2013 the overall unemployment deficit (estimated at about 29 percent of deficit. Priority will have to be given to rate stood at 2.9 percent, unemployment GDP in 2014/15), to which the hydropower private sector development and asset di- was more prevalent among urban, female, sector contributed a third. It is essentially versification if Bhutan wants to reduce its and relatively well-educated individuals financed by donor resources, of which In- and youth unemployment reached 9.9 per- dia contributes the most through loans and vulnerability to donor finance and address cent. Per capita income is estimated at grants financing hydropower projects. In- rising youth unemployment. $2,418 at end 2014. ternational reserves had built up to US$ Projected poverty rate in 2014 indicate that 1,184 million by December 2014, reflecting the pace of poverty reduction has slowed prudent management. down since 2012, the last year for which Consumer price inflation in Bhutan has official poverty estimate is available. From slowed to 6.3 percent in January 2015 from FIGURE 1 Bhutan / Contributions to Annual GDP Growth FIGURE 2 Bhutan / Poverty Incidence and Per Capita GDP Growth Poverty PPP $1.25 a day 20.0% Net taxes on products Headcount PPP $2.00 a day Services Rate Industry 30 15.0% Agriculture, livestock, and forestry 24.9 24.7 25 23.0 20.7 10.0% 18.9 20 15 5.0% 10 0.0% 5 2.5 2.5 2.1 1.6 1.3 2007 2008 2009 2010 2011 2012 2013 2014 0 -5.0% 2012 2013e 2014e 2015f 2016f Sources: National Bureau of Statistics, World Bank staff estimates. Sources: 2014 projections, World Bank staff estimates based on GDP growth elasticity approach. MPO 1 Apr 15 11.3 percent at the end of 2013, driven by ments. The revenue effort should weaken assets. Similarly, shared prosperity will the decline in oil prices and India’s easing slightly, unless new measures to strength- depend on the ability of the economy to of inflation (Bhutan has a fixed exchange en the tax base are introduced. provide jobs to the educated youth whose rate with India from which it imports most The risk of Bhutan’s external debt distress aspirations increasingly differ from exist- of its consumption). continues to be moderate. This is based ing employment opportunities. on the commercial viability of the hydro- While debt risk is still moderate, the rapid power projects, the risk-sharing agree- -build-up over the recent years cautions Outlook ment with India for hydropower loans, Bhutan’s strong track record of project against any additional non-concessional borrowing, given that Bhutan’s debt car- 2015 economic activity is expected to gain implementation, rapid growth in energy rying capacity will only improve in the momentum with real GDP growing at 6.9 demand from India, committed donor long run reflecting significantly higher percent, driven by new hydropower con- support, and Bhutan’s high level of inter- electricity exports when hydropower pro- struction and innovative tourism national reserves. jects come on stream. Efforts to deepen the measures (“Visit Bhutan 2015”). Agricul- With faster GDP growth, poverty reduc- financial sector will need to be sustained ture is projected to grow at its historic rate tion in projected to pick up between 2014 to provide the country the basis for financ- of 2 percent. Economic growth will only and 2016 to an average 2.1 percentage ing sound and sustainable development pick up at end 2018, when new hydro- points per year. Poverty headcount rate and diversification. power projects will come on stream. Do- based on PPP $2.5 day is expected to be Poor Households also face new risks and mestic demand will be driven by hydro- 18.9 percent in 2016. vulnerabilities requiring new strategies. power investment and, to a lesser extent, Limited land for agriculture, higher expo- government consumption. Consumer in- sure to international commodity prices flation will closely follow India’s tracks. The current account deficit is expected to Challenges and changing social structures can in- crease poor households’ vulnerability to continue growing over the next years, The outlook is positive but macroeconom- shocks and reduce their ability to deal driven by the construction of hydropower ic pressures on domestic demand will with unexpected situations. The govern- projects. The current account deficit out- have to be managed. Hydropower pro- ment of Bhutan plays an important role in side the hydropower sector is forecasted jects coming on line in 2018 and 2019 will the development of new social protection to remain stable, supported by a robust provide the much needed domestic re- strategies to help cope with unexpected growth in the tourism sector. Fiscal policy sources to finance the -- fiscal and external events, especially for the most vulnerable. is assumed to remain in balance, support- current -- twin deficits. The extent to ed by donor grants, with current spending which this relief will be lasting depends contained, and capital spending following on whether hydropower rents will be the patterns of the five-year plan disburse- used to diversify the country’s economic TABLE Bhutan / Macro poverty outlook indicators 2012 2013 2014 2015 f 2016 f 2017 f Gross domestic product (real terms, % variation) 5.1 2.0 5.7 6.9 6.8 7.6 Private consumption 5.0 12.7 6.6 6.6 6.6 6.6 Government consumption -0.8 -9.6 22.6 5.3 4.4 6.4 Gross fixed capital investment 2.9 -26.2 2.7 17.3 12.4 1.0 Change in inventories, % contrib Statistical discrepancy (% GDP) 7% 6% 18% 14% 14% 15% Exports, goods & services -1.2 7.4 6.2 0.5 4.7 9.7 Imports, goods & services -6.1 1.6 18.6 4.4 8.7 4.6 GDP, at market prices (real terms, $ variation) 5.1 2.0 5.7 6.9 6.8 7.6 Agriculture 2.3 2.9 2.1 1.9 1.8 1.8 Industry 6.8 3.5 7.3 9.8 9.3 10.8 Services 0.9 1.7 4.7 4.7 4.8 4.9 Output Gap n.a. n.a. n.a. n.a. n.a. n.a. CPI Inflation , period average 9.5 11.3 6.3 6.0 6.0 6.0 Current account balance, % of GDP -21.7 -23.5 -25.3 -29.0 -31.4 -33.0 Fiscal balance, % of GDP -1.1 -4.2 -2.6 -2.2 -2.0 -1.3 Poverty rate (National Poverty Line, R 443 per month) 2.5 2.5 2.6 1.6 1.3 Poverty rate, $1.25 a day, PPP terms) 24.9 24.7 23.0 20.7 18.9 Gini coefficient of consumption Sources: National Statistical Bureau, Royal Monetary Authority, Ministry of Finance, World Bank staff forecasts Notes: e: estimates; f: forecasts; * In annual percentage change percent, unless otherwise noted; ** Fiscal years (e.g. 2014 is 2013/2014). MPO 2 Apr 15