𝐅𝐢𝐬𝐜𝐚𝐥 𝐏𝐫𝐞𝐬𝐬𝐮𝐫𝐞𝐬 𝐌𝐨𝐮𝐧𝐭 𝐚𝐬 𝐁𝐡𝐮𝐭𝐚𝐧 𝐅𝐚𝐜𝐞𝐬 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐇𝐞𝐚𝐝𝐰𝐢𝐧𝐝𝐬 𝐀𝐦𝐢𝐝 𝐑𝐞𝐜𝐨𝐯𝐞𝐫𝐲

…𝒘𝒉𝒊𝒍𝒆 𝒈𝒓𝒐𝒘𝒕𝒉 𝒑𝒓𝒐𝒋𝒆𝒄𝒕𝒊𝒐𝒏𝒔 𝒓𝒆𝒎𝒂𝒊𝒏 𝒔𝒕𝒆𝒂𝒅𝒚, 𝒕𝒉𝒆 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒈𝒓𝒂𝒑𝒑𝒍𝒆𝒔 𝒘𝒊𝒕𝒉 𝒓𝒊𝒔𝒊𝒏𝒈 𝒅𝒆𝒃𝒕, 𝒆𝒙𝒕𝒆𝒓𝒏𝒂𝒍 𝒔𝒉𝒐𝒄𝒌𝒔, 𝒂𝒏𝒅 𝒔𝒕𝒓𝒖𝒄𝒕𝒖𝒓𝒂𝒍 𝒗𝒖𝒍𝒏𝒆𝒓𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝒕𝒉𝒂𝒕 𝒕𝒉𝒓𝒆𝒂𝒕𝒆𝒏 𝒍𝒐𝒏𝒈-𝒕𝒆𝒓𝒎 𝒔𝒕𝒂𝒃𝒊𝒍𝒊𝒕𝒚

By Lhendup Wangmo

Bhutan’s economic recovery post-pandemic is under threat as rising fiscal pressures and structural vulnerabilities continue to build. While growth is projected to remain steady at 4-5% in the coming years, the nation’s ability to maintain stability is increasingly challenged by growing debt, external shocks, and imbalances within its economy.

Post-pandemic recovery has been primarily driven by an expansionary fiscal policy, with the government increasing spending to revitalize the economy. However, this approach, while vital for short-term recovery, has not addressed deeper structural imbalances that continue to weigh on the nation’s economic foundations. Rising prices for essential goods, particularly food and energy, have caused inflationary pressures, which reduce household purchasing power and living standards.

The labor market remains sluggish, with high levels of unemployment, particularly among youth and skilled workers. Many are leaving the country in search of better opportunities abroad, further depleting the local talent pool. This migration, coupled with a narrow industrial base and underdeveloped private sector, limits the economy’s diversification and resilience.

Externally, the nation faces challenges stemming from global economic trends. The slow global recovery from the pandemic, along with trade disruptions, geopolitical tensions, and supply chain issues, have contributed to a rise in commodity prices. As the nation imports a significant portion of its goods and services, such price increases worsen the current account deficit and deplete foreign reserves, creating additional pressures on the economy.

A comprehensive Debt Sustainability Analysis (DSA) raises concerns about the nation’s ability to manage its public debt. The analysis indicates that the debt-to-GDP ratio, which stood at 119% in 2023, is highly sensitive to economic fluctuations. A reduction in GDP growth by 1-2 standard deviations could result in a significant increase in this ratio, pushing it to 128% in 2023 and 135% by 2024.

This highlights the nation’s vulnerability to global economic uncertainties. A slowdown in global growth, coupled with rising commodity prices and trade disruptions, could lead to a further deterioration in the debt burden. The reliance on imports means that any reduction in trade or disruptions in global markets would exacerbate fiscal challenges.

The fiscal balance is another area of concern. Government revenues and expenditures remain sensitive to fluctuations, and any deterioration in the primary fiscal balance could further strain the economy. A decline in either revenue generation or public spending could cause the debt-to-GDP ratio to increase slightly. Specifically, a negative shock to the primary balance would raise the ratio from 119% in 2023 to 120% or 121%, and in 2024, it could rise to 116%.

Despite ongoing fiscal consolidation efforts, rising interest payments on existing debt continue to place pressure on public finances. With limited revenue generation sources and low economic diversification, maintaining fiscal discipline remains a major challenge.

Export performance is crucial in addressing the growing trade deficit and dwindling foreign reserves. The nation’s export growth has been sluggish, hindered by factors such as limited private sector development, weak global demand, and logistical challenges. If export growth does not pick up, the trade deficit will continue to widen, further depleting foreign exchange reserves.

The DSA points out that any shock to exports could increase the debt-to-GDP ratio. A negative shock would lead to a rise in the ratio to 124% in 2023, and to 131% in 2024, emphasizing the importance of diversifying exports and improving competitiveness in international markets.

The nation’s foreign-denominated debt presents another significant risk, particularly in the event of exchange rate depreciation. A 10-20% depreciation of the national currency could push the debt-to-GDP ratio up to 138% by 2024. This risk is compounded by rising global interest rates, which may lead to capital flight and further depreciation of the currency. As foreign investors seek higher returns elsewhere, the country could experience reduced capital inflows, making it harder to service foreign-denominated debt.

In addition to direct fiscal risks, the nation also faces substantial contingent liabilities. Explicit liabilities, such as government guarantees for public entities like Drukair and the National Housing Development Corporation, amounted to Nu 5.07 billion in external debt and Nu 2.92 billion in domestic debt as of March 2023. Implicit liabilities, arising from guarantees to state-owned enterprises (SOEs) and other public institutions, total Nu 4.83 billion.

These liabilities represent potential future obligations that the government may be forced to absorb, especially if SOEs face financial difficulties. Given the low profitability in key sectors, including air transport and housing, the likelihood of government intervention to cover these liabilities increases, placing additional pressure on public finances.

The nation’s vulnerability to natural disasters, such as earthquakes, floods, and glacial lake outburst floods, adds another layer of risk to fiscal sustainability. The country’s mountainous terrain and climate change-related impacts make it particularly susceptible to such disasters. These events not only disrupt economic activity but also lead to significant fiscal costs for disaster response and recovery.

The fiscal risks facing the nation are considered moderate, but the potential for these risks to materialize is substantial. GDP growth shocks are the highest risk, driven by external challenges like trade imbalances and declining foreign reserves. Risks related to the primary fiscal balance and export performance are moderate, reflecting the ongoing fiscal consolidation efforts despite growing interest payments and weak private sector growth.

Exchange rate depreciation and contingent liabilities also pose moderate risks, with exchange rate fluctuations likely to increase the burden of foreign debt. Risks from natural disasters are categorized as moderate due to the country’s exposure to environmental shocks.

The economic outlook remains cautiously optimistic, with growth expected to continue at a modest pace. However, the nation faces significant risks from a combination of internal and external pressures, including rising debt levels, weak export growth, exchange rate vulnerabilities, and contingent liabilities. The government must focus on improving fiscal sustainability by enhancing revenue generation, reducing reliance on imports, and diversifying exports. Strengthening resilience to external shocks and investing in disaster preparedness will also be crucial in safeguarding long-term stability.

As Bhutan faces these mounting fiscal risks, careful policy decisions will be crucial in ensuring long-term economic sustainability. Strengthening revenue generation, diversifying exports, and addressing contingent liabilities will be key to safeguarding the country’s future stability and navigating the economic headwinds ahead. However, through careful fiscal management and strategic policy reforms, the nation can navigate these challenges and ensure its continued recovery and future prosperity.