Bhutan’s Fiscal and Monetary Measures coming out of COVID-19 years

Dochula Pass, Bhutan

Dochula Pass, Bhutan

© Karma Choden

Similar to other south-east countries such as India, Sri Lanka and Nepal, Bhutan is experiencing record fiscal deficit and declining reserves in the post COIVD-19 years. During FY 2019-20 Bhutan’s $2.4 billion economy contracted by 2.4 percent and by 3.7% the fiscal year after.  The 2022-2023 Annual Budget Report reported a fiscal deficit of Nu. 22.882 billion (USD 0.2933 bn), which was 11.25 percent of the GDP. For the 2021-2022 budget year it was Nu. 17.498 billion (0.2242bn[1]) and 9.3 percent of the GDP. Bhutan’s reserve for 2022-23 is at 17 months which is a decline from 22 months in 2021-22. It is further expected to decrease to 16 months in 2023-24 months. The overall fiscal deficit is estimated to increase by almost 97% from the initial 12th Five-Year Plan (2018-2023) estimates to Nu. 57,648.838 million (USD 739.087 mn).

All these pose major risks for the already weakened economy impacted by limited domestic revenue collections and increased spending. The increase in spending was also driven by COVID-19 relief measures which is estimated to be 6.6 percent of GDP. Inflation continues to remain elevated due to disruption in the supply chain and the spillover effects of inflationary pressure from India with rise in food and non-food prices; with over 80 percent of trade with India with its currency pegged to the Indian Rupee, any depreciation raises import costs from third countries. The purchasing power of Bhutan Ngultrum (BTN) is Nu. 61 (USD 0.78) as compared to December 2012 after a drop of 5.28 percent between March 2021-March 2022.

The global inflationary situation has been further exacerbated by the on-going Russia-Ukraine crises. The prices of consumer goods and services has increased by 5.57 percent[2] between March 2021-March 2022. The increase in fuel prices (petrol and diesel) contributed to 64 percent of the overall increase. As expected, the  recurrent increase in petrol and diesel prices, with its cascading effect, has led to increase in the prices of daily consumable and other goods which impact consumers throughout the supply chains; food prices contributed around 60 percent to the overall inflation in 2021.

With the resumption of its economic activities after around 50 days of lockdowns and blackouts between Jan-March 2022, this has further resulted in a  significant increase in imports and widening of the current account deficit. As an economy heavily import-dependent and with limited inflows, there will be further strain on the foreign currency reserves.

Actions taken by the government as part of remedial measures to revive and stabilize the economy has contributed to an improvement in the country’s business environment with the removal of many COVID-related restrictions and ease of doing business conditions. Among the many measures to revive the domestic production capacities, the most effective has been the lifting of restrictions on foreign workers which has helped in resuming the infrastructure and construction sector while injecting funds into the service sector through the utilization of quarantine facilities while the foreign workers are availing their permits.

There has been other steady flow of measures aimed at making business-friendly regulations through the encouragement of new industries in the identified industrial parks and recommendation of fiscal and monetary measures as well as carrying out bilateral economic diplomacy to attract FDI interest and facilitate exports.

To provide support for the economic sectors, the new Fiscal Incentives Act of Bhutan (FIAB) 2021 was reviewed and passed by the government. The FIAB 2021 provides various direct and indirect tax incentives to ease the burden of the COVID years’ economic fallout. The multiple Customs Duty rates have been simplified to 10 percent. Time extension to settle taxes were provided without levying 24 percent penal interest to tour operators and shall be applicable either when the mandatory quarantine for tourists is lifted or extension up to 31 December 2022. Rental waivers of government property leased by tourism-related businesses were also made available, which was calculated at around Nu. 51 million (USD 0.653 mn).

To support impacted sectors, the Monetary Measures (MM) Phase IV is planned for implementation; it includes deferment of loan repayment under three windows (Past Non-Performing Loans (NPLs), present credit portfolio and future credit) based on sector risks and severity of impact from the COVID-19 crisis. The new credit reforms promote improved end-to-end credit ecosystem, extension of loan terms for hotel and restaurants and enhanced judiciary support to expedite NPL resolution. The maximum loan term for new or existing construction or setting-up hotels and restaurants has been set for upto 30 years excluding the gestation period. Tax exemptions for small and micro businesses in rural areas upto 31 December 2024 have also been provided.

Other initiatives as part of the economic recovery measures focused on areas of technology, infrastructure, energy, water and food which is estimated at around Nu. 45,132 million (USD 578.61 mn) over a period of 10 years. For the FY 2022-2023, Nu. 1000 million (USD 12.82 mn) is earmarked to initiate these programs.

Implications on Bhutanese life

The pandemic shone a spotlight of the vulnerabilities Bhutan and its citizens face as a small landlocked nation.

A contracted economy has long lasting social and cultural repercussions, one being that it puts more people into poverty. The World Bank had projected the poverty rate at 12.6 percent for the FY 2020-21 which was a moderate increase from 11.6 percent for the FY 2019/22. The poverty rate is measured at $3.2 earned daily per person; which makes this section of the society hardest hit by the retail inflation. This inflation is likely to remain elevated for the short-term.

The long COVID-19 lockdowns which led to disrupted supply chains exposed vulnerabilities of food security and supply for this small landlocked country. Towards strengthening food security, a stimulus plan with a total budget of Nu.944 million (USD 12.10 mn) was initiated to increase domestic production, create employment and income opportunities. 

The unemployment rate is projected to trend around 4.10 percent in 2022 and 3.20 percent in 2023, which may bring unwanted rise in crime and this hampers the peace ranking for Bhutan (which is 22nd as per Global Peace Index (GPI))

Due to limited employment opportunities, the number of Bhutanese leaving Bhutan for countries of Australia, Canada, Japan, etc. is on the rise. The most commonly stated reason for  leaving are primarily more money and better opportunities than those available in the home country.

The rise in fuel price have resulted in the citizens exploring alternatives to personal transport. The retail of Electric Vehicles (EV) sales has witnessed over threefold jump in the Q1 of 2022; EVs now account for 4.6 percent of all passenger vehicles being sold in Bhutan. There are around 948 EVs in the country including EV taxis.[3]

In the times to come, the COVID-19 pandemic and its aftermath is a period that would remain challenging for Bhutan. However, the government is hopeful that if the commissioning of the Puna -II hydro plant happens as per schedule, it would go a long way in reducing fiscal burden through the sale and export of electricity. 


[1] Exchange rate USD 1: BTN 78

[2] National Statistical Bureau, 2022, Consumer Price Index.

[3] Vehicles Statistical Bulletin of MoIC.