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ECONOMY OF BHUTAN

Updated on July 04, 2004

CONTENTS

1. Introduction

2. Agriculture

3. Power

4. Trade

5. Foreign Debt

6. Tourism

7. Latest News on Economy: Economy doing well, January 10, 2004 and Balance of payment sees record growth, January 10, 2004

1. INTRODUCTION

Bhutan’s economy is wholly dependent on India. It was the benevolent Nehru, who put Bhutan on the path of economic development. As a least developed country Bhutan depends on foreign aids for financing its developmental programmes and establishment costs. India has been the largest donor of external aid to Bhutan and its main development partner. Bhutan’s first  Five Year Economic Development Plan (1962-67) was totally funded by India. India has committed Nu/Rs.9000 million (  US $ 215 million) for the current Eighth Plan (1997-2002). Once totally dependent on India for its development assistance and government’s establishment expenses, Bhutan  has been  increasingly turning to various  bilateral, multilateral, and international  finances. The  United Nations, World Bank, Asian Development Bank, Australia, Austria, Finland, Denmark, Japan, Netherlands, Norway, Canada, Switzerland, Germany, Italy, New Zealand, Sweden, Republic of Korea,  United Kingdom and the United States provide foreign aid to Bhutan.

Bhutan’s economy saw a healthy growth in 2002 with the GDP climbing to 7.7 percent in 2002 from 6.6 the previous year, according to the annual report of Bhutan’s central bank, the royal monetary authority (RMA), and the momentum was maintained in 2003.  The renewable natural resources sector which includes livestock, forestry, logging and major cash crops like mandarin and apple, continued to dominate the share of the GDP with 33 percent in 2002. It remains the most significant sector, employing about 75 percent of the country’s labour force, the report pointed out. Construction and electricity were also key players in 2002, contributing 17 percent and 9.7 percent.   The push on the construction sector was mainly because of large power projects like Tala, Kurichhu and Basochhu. The construction work in the private sector, government and other agencies were increasing and, to an extent, buoyed the GDP growth. Reduction of interest on housing loans is expected to push up construction activities considerably, according to the annual report of the Royal Monitory Authority (RMA), Bhutan's Central Bank, as reported by the  government-owned Kuenselonline,  January 10, 2004.

2. AGRICULTURE

Bhutan is a predominantly agricultural country. Traditional form of agriculture is the main subsistence occupation of the majority of Bhutanese people. Majority of the work force is involved in the agricultural sector  including agriculture and  livestock. Only 7.7 % of the total land is suitable for agriculture.  According to government estimate, agriculture share to GDP was  36.4 % in 1997;  36.1 % in 1998 and  34.8 % in 1999.

3. POWER

The hydroelectricity power sector is the single biggest revenue earner of Bhutan. Bhutan’s hydro-electricity power potential is estimated at about 30,000 MW. Out of which, safe and exploitable water resources potential are estimated at 6000 MW. India has helped Bhutan in the development of its  hydro-power resources in a big way. In fact, Indian assistance is unique. The  hydro-power cooperation between Bhutan and India started   with the signing of Jaldhaka agreement in 1961. Please click on Hydro-Electricity for details.

Hydroelectricity export has become a significant source of revenue for Bhutan. It has even made Bhutan’s trade with India surplus by Nu 448.7 million for the first time in 1996. The export of Chuka electricity changed the trade balance scenario in favour of Bhutan. As a consequence, its overall balance of payment with India was surplus by Nu 79.59 million according to the Royal Monetary Authority of Bhutan. It generated 1,972.18 million units (MUs) of electricity in 1995-6. Its export to India was to the tune of 1,564.04 MUs at a value of Nu 747.56 million.

The Chukha hydropower project sold  Nu 2,171 million worth of electricity to India in 2002. Kurichhu power project sold 97 percent of its electricity to India.

According to the government sources, by the year 2006, Bhutan would be exporting about 6,400 MUs of power annually. The revenue from hydropower projects along with earnings from the other traditional revenue sources could reach about Nu. 15 billion annually.

4. TRADE

Despite the efforts of diversification, India has been the biggest market for Bhutan’s products and imports. India is not only the major foreign aid contributor to Bhutan’s economic development, but a mainstay for its economic survival. India wholly financed the first two five year economic development programmes. As a landlocked country, India had been and is a major trading partner of Bhutan in her economic development and external trade. Before eighties, third country import and export was non existent in Bhutan. Indian aid accounts for more than sixty percent in its  fifth five year economic development plan.

Import: India is Bhutan largest source of imports. The daily necessity of household items like rice, lentils, vegetables, meat, fish, wheat, cooking oil and salt are entirely imported from India. Besides petroleum products, tyres, trucks, cars, CGI sheets, steel, sugar, motor cycles, scooters, medicines and textile goods are some of the main import items from India.

In 2002, total imports were worth Nu 8,023.7 million, down from Nu 8,990.2 million the previous year, according to the annual report of the Royal Monitory Authority (RMA). The country imported Nu 6,051.1 million worth of goods from India followed by Nu 326.9 million from Japan and Nu 282.3 million from the United Kingdom. Imports from Singapore and Thailand came to a total of Nu 487 million. Import items included fuel, cereals, motor vehicles, machinery and mechanical appliances, metal products, plastic and rubber products, as reported by the  government-owned Kuenselonline,  January 10, 2004

In 1994, it imported rice valued at Nu 191m from India, which ranked first in its list of import items. The value and percentage of ten major items imported from India in 1995 were as follows: Industrial plants Nu 142m (6%), diesel Nu 136m (5%), alcoholic spirit Nu 75m (3%), petrol Nu 64m (2.4%), vegetable oils Nu 62m (2.3%), refined oils Nu 58m (1.8%), beer 48m (1.8%), trucks Nu 47m (1.8%), charcoal Nu 46m (1.7%), cotton fabrics Nu 42m (1.6%)

In 1988, Bhutan’s import bill from India was to the tune of Nu 1108.9 million (m) and only Nu 663 m from third countries. Similarly, its import bill from India rose to Nu 1214m but reduced to Nu 249m from third countries in 1989.

Export: Bhutan exports electricity, horticultural products, cement, canned fruit-products, alcoholic and non-alcoholic beverages,  ferro-silicon, calcium carbide, gypsum, marble, dolomite, boulder, cement wood and wood products to India. Bhutan’s total export amounted to Nu 1,042m in 1988. India’s share was 989m and third countries were 53m. Likewise, it exported 985m to India and 146m to third countries in 1989. 

Electricity remained  the largest export commodity in 2002. The sales from the export of electricity from the Chukha hydropower project to India was Nu 2,171 million in 2002. Kurichhu power project sold 97 percent of its electricity to India, according to the annual report of the Royal Monitory Authority.  Bhutan’s total export was worth Nu 5,261.8 million in 2002, showing a climb of 8.2 percent. The trade was highest with India with total exports of Nu 4,919.1 million followed by Bangladesh with Nu 222.7 million. After electricity, export items included products of chemicals, metal, wood, and processed food, mineral products, textiles followed by stone, cement and asbestos products. According to the report the trade deficit with India continued to grow while with other countries the deficit had fallen by 25.4 percent, as reported by the  government-owned Kuenselonline,  January 10, 2004

The value and the percentage of the nine major commodities exported to India in 1995 were as follows: Electric energy Nu 721m (23%), calcium carbide Nu 497m (16%), ferro-silicon Nu 340 (11%) Particle boards Nu 329m (10%), cement Nu 278m (9%), saw logs 132m (4%), cardamom 74m (3%), alcoholic drinks Nu 66m (2%), potato Nu 62m (2%).

Bhutan generated 1,972.18 Million Unit (MU) of electricity in 1995-6. Its export to India was to the tune of 1,564.04 MU at a value of Nu 747.56 million. Since India financed the entire cost of Chuka hydel of about Nu three billion, it paid only 0.50 per unit until 1997. In 1998 the rate of power was revised to Nu 1.00 per unit. Bhutan exports more than 80 percent of its total generation of power to India.

Foreign exchange reserves : Year 2003 saw Bhutan’s balance of payments record yet another surplus with foreign exchange reserves reaching US $374 million which was sufficient to finance over 23 months of imports. The strong Indian Rupee has also led to the Ngultrum growing in value against the US$ (Ngultrum is pegged to Rupee). The increase in reserve, according to RMA, was mainly propelled by the inflow of loans, grants and foreign direct investment (Nu 117.9 million) largely in the international resort construction in the country, as  reported in Kuensel,  January 10, 2004.

Bhutanese currency Ngultrum (Nu) is pegged at par with the Indian rupees. Article 7 of the Bhutan-India Agreement on Trade and Commerce says that the "Trade between Bhutan and India will continue to be transacted in Bhutanese Ngultrums or Indian Rupees." Bhutan pays in rupees even for petroleum products to its advantage, considering the fact, that India itself imports crude oil from the middle east. Again, the Nu is legally tendered at the adjoining Indian areas bordering Bhutan. In these areas trade and commerce are conducted both in Nu and Rupees.

Bhutan’s minuscule private sector is growing. They are allowed to invest in conjunction with government development plans. The government has retained the control of mega- projects like power projects.

5. FOREIGN DEBT

As a least developed countries, Bhutan seeks external  assistance/debts from  India,  third countries and multilateral financial organizations. In 1994, the total foreign loans, excluding from India stood at US $ 102.24 million according to the report of Royal Monetary Authority of Bhutan, the central Bank of Bhutan.

In 2002, external debt grew by 40 percent to US$ 405.5 million. Bhutan’s largest creditor remained India with an outstanding debt of US$ 228.7 million followed by Asian Development Bank, US$ 75.8 million, World bank, US$ 42.9 million, and the Austrian government with US$ 34.7 million. Debt servicing was manageable at 4.9 percent of the total export of good and services, Kuensel January 10, 2004

6. TOURISM

Bhutan accepts limited number of tourism. Tourism is controlled.

Number of tourist arrivals by region

Region

1997

1998

1999

America

1,010  

1,714

2,285

Asia & Pacific

1,712  

1,418  

1,599

Europe

2,590

3,062

3,118

Others

51

9

156

All region

5,363  

6,203  

7,158

Revenue earning (US $ million)

6.50

7.98

8.8

Latest News on Economy

Economy doing well, RMA reports

Kuensel January 10, 2004

Bhutan’s economy saw a healthy growth in 2002 with the GDP climbing to 7.7 percent in 2002 from 6.6 the previous year, according to the annual report of Bhutan’s central bank, the royal monetary authority (RMA), and the momentum was maintained in 2003.

The renewable natural resources sector which includes livestock, forestry, logging and major cash crops like mandarin and apple, continued to dominate the share of the GDP with 33 percent in 2002. It remains the most significant sector, employing about 75 percent of the country’s labour force, the report pointed out. Construction and electricity were also key players in 2002, contributing 17 percent and 9.7 percent.

The push on the construction sector was mainly because of large power projects like Tala, Kurichhu and Basochhu. The construction work in the private sector, government and other agencies were increasing and, to an extent, buoyed the GDP growth. Reduction of interest on housing loans is expected to push up construction activities considerably.

Sales from the export of electricity from the Chukha hydropower project to India was Nu 2,171 million in 2002. Kurichhu power project sold 97 percent of its electricity to India. Bhutan’s total export was worth Nu 5,261.8 million in 2002, showing a climb of 8.2 percent. The trade was highest with India with total exports of Nu 4,919.1 million followed by Bangladesh with Nu 222.7 million. After electricity, export items included products of chemicals, metal, wood, and processed food, mineral products, textiles followed by stone, cement and asbestos products.

Total imports were worth Nu 8,023.7 million, down from Nu 8,990.2 million the previous year. The country imported Nu 6,051.1 million worth of goods from India followed by Nu 326.9 million from Japan and Nu 282.3 million from the United Kingdom. Imports from Singapore and Thailand came to a total of Nu 487 million. Import items included fuel, cereals, motor vehicles, machinery and mechanical appliances, metal products, plastic and rubber products.

According to the report the trade deficit with India continued to grow while with other countries the deficit had fallen by 25.4 percent.

Year 2003 saw Bhutan’s balance of payments record yet another surplus with foreign exchange reserves reaching US $374 million which was sufficient to finance over 23 months of imports. The strong Indian Rupee has also led to the Ngultrum growing in value against the US$ (Ngultrum is pegged to Rupee). The increase in reserve, according to RMA, was mainly propelled by the inflow of loans, grants and foreign direct investment (Nu 117.9 million) largely in the international resort construction in the country.

Tourism, in the atmosphere of the Iraq war and SARS, brought in 6,093 tourists in 2003 raising its contribution to the government coffers to US $8.4 million from US$ 8.0 million in 2002. The year also saw domestic credit grow to Nu. 3,815 million from Nu 2,280.5 million allaying the complaints of the businessmen and stimulating sector growth.

In June 2003, inflation fell to 1.8 percent recording an all time low in 20 years.

According to the report, the government’s policy of cautious fiscal management did not work when, in 2003, the overall budget deficit increased to Nu 2,784 million from 1,225.4 million in the previous year. Soft borrowing, however, helped to narrow the deficit. Although domestic revenue was more than sufficient to finance current expenditure and some capital expenditure, Bhutan was still highly dependent on external assistance through grants and concessional loans to finance infrastructure and other capital-related projects.

External debt grew by 40 percent to US$ 405.5 million. Bhutan’s largest creditor remained India with an outstanding debt of US$ 228.7 million followed by Asian Development Bank, US$ 75.8 million, World bank, US$ 42.9 million, and the Austrian government with US$ 34.7 million. Debt servicing was manageable at 4.9 percent of the total export of good and services.

Approval of foreign direct investment, Bhutan’s membership to the International Finance Corporation and the commissioning of Kurichhu, Basochhu and Tala power projects, the report say, would have a major impact in the future economic trend.

Balance of payment sees record growth

Kuensel January 17, 2004

Bhutan’s balance of payments (BOP) recorded a 100 percent growth in 2003, from Nu 1,244.0 million in 2002 to Nu 2,573.2 million, propelled largely by the inflow of loans, grants and foreign direct investment (FDI), according to the annual report of the royal monetary authority (RMA).

This means that the money that Bhutan received was Nu 2,573.2 million more than what the country paid out.  As a result Bhutan’s foreign exchange reserves also saw an increase of US$ 57.1 million taking the total to US$ 374.0 million from US$ 316.9 million in 2002. The cash was sufficient to finance 23 months of imports.

The current BOP is estimated at 10.7 percent of the GDP. Invisible receipts (also current transfer receipts), particularly inflow of grant and aid, was Nu 10,180.7 million in 2003 compared with Nu 6,222.0 million in the previous year.   Reasons for the “significant” growth were mainly due to releases of “non-budgetary” Indian grant funds for major power projects in the country along with convertible currency grant disbursement received as concessional or soft loans from international aid agencies and foreign governments.

A majority of loans went to Tala, Kurichhu and Basochhu hydropower projects, and also to agriculture. Commercial borrowings were negligible but FDI, since government approval in December 3, 2002, had spurred direct investments in Bhutan mainly in tourism and the hotel industry. In 2003, FDI inflows in resort construction totalled Nu 117.9 million. With the recent January 2004 additional loan of US$ 10.0 million for luxury resorts approved by the IFC, the FDI inflows surged.

Remittance from Bhutanese working and living abroad, especially in USA, have totalled Nu 28.9 million in 2003.

Although less than inflows, there were also extensive current transfer outflows from the country in 2003. Firstly import of services exceeded exports by Nu 780.5 million. The negative growth in part was due to a huge growth in payments for “service imports”, by 42.8 percent, mainly to foreign nationals for their services to the government and travel abroad by Bhutanese.

Secondly there was the net outflow of income of Nu 646.6 million, a two-fold increase from 2002, caused chiefly by lower income from investment abroad which, in the atmosphere of the Iraq war, was faced with global decline in interest rates.

Outward remittances from aid-related projects were estimated at about 20 percent of all foreign aid received by Bhutan, including concessional loans and grants. In 2003, it was Nu 2,180.3 million.

In 2003, imports from India grew by 17.4 percent to Nu 8,203.5 million, outdoing exports of Nu 5,095.3 million. At present the trade deficit with India is Nu 3,108.2 million and as a percentage of GDP at 11.3 percent. India makes up 75.5 percent of all of Bhutan’s imports and 94.3 percent of all of Bhutan’s exports.

Sale of electricity from Chukha and Kurichhu dominated Bhutan’s exports to India and was responsible for 43.7 percent of the country’s overall exports. 

Negative BOP with India has been continuing for nearly eight years.

On the other hand, imports from countries other than India have reduced by about 58 percent, the trade deficit improving from Nu 1,707.1 million in 2002 to Nu 528.0 million in 2003. However, import payments from these countries were still larger, about three times more than export earnings of just Nu 310.6 million.  The RMA report says that Bhutan had always faced large trade deficits because nearly all consumer and capital goods were imported from India and other countries.