THE PAPER | Bhutan’s Macroeconomic Situation, Development Objectives and Key Sectors

THE PAPER | Bhutan’s Macroeconomic Situation, Development Objectives and Key Sectors

 By Zhu, Da, Dominic Pasquale Patella, 
Roland Steinmetz, and Pajnapa Peamsilpakulchorn

THE PAPER | Bhutan’s Macroeconomic Situation, Development Objectives and Key Sectors

Image Attribute: Bhutanese School Boys, Outskirt of Thimpu City, Bhutan 

Key Messages
  • Bhutan’s economy is on the rise and is driven largely by hydro-power development, tourism, and services.
  • Green growth is at the heart of Bhutan’s development goals, and the national strategy calls for ecologically balanced sustainable development.
  • Bhutan currently runs a large and growing account deficit due to increasing demand for imports, which poses a key macroeconomic management issue.
  • Bhutan’s fiscal position is sound with prudent management of spending, but tax collection could be improved to increase revenue.
  • Improving the availability and quality of urban transport services in Bhutan is important.To accommodate the growing urban populations and increasing levels of motor vehicle ownership, the main urban centers of Bhutan (Thimphu and Phuentsholing) will need to focus on expanding the availability and quality of urban infrastructure and services, including transport services
GDP Growth and Current Account Deficit

After a policy-engineered slowdown in 2012, which saw GDP growth decline to 4.8 percent (the lowest since 2008), in 2013 the economy in Bhutan managed to rebound to a GDP growth of 6.5 percent, supported by hydro-power construction and higher electricity and food production following favorable rains. The macroeconomic projections for 2014 set GDP growth at 7.3 percent, which would stem from new projects, increased tourism receipts, easier credit conditions, and the effects of the Economic Stimulus Plan (World Bank 2014). One of Bhutan’s key macroeconomic issues is its large and growing current account deficit, which was estimated at about 25 percent in 2013. Currently, the account deficit is projected to deteriorate over the medium term because of strong growth in import demand associated with the construction phase of the hydropower projects, as well as hydro debt service. When the hydropower projects are completed, however, electricity exports are likely to more than triple from current levels. The current account deficit should thus decline over the longer term, leading to a balance of payment surpluses starting in 2020.

Tight public spending has kept the fiscal deficit in Bhutan below 5 percent of GDP, despite a sharp decline in revenues. Overall, the fiscal deficit is estimated at 4.5 percent of GDP in 2013/14. The government continues to rely heavily on foreign grants to finance its expenditure; in FY2012/13, grants financed about 36 percent of total spending (10 percent of GDP), with 70 percent of grants coming from the government of India.

Eleventh Five-Year Plan: Self-Reliance and Green Socioeconomic Development

The Royal Government of Bhutan (RGoB) recognizes that Bhutan is facing both the challenges and opportunities of the 21st century in adapting social, environmental, and economic integration to a more globalized world. The recently announced 11th Five-Year Plan (FYP) for 2013–2018 (Gross National Happiness Commission, Royal Government of Bhutan 2013) focuses mainly on self-reliance and inclusive green socioeconomic development. Even with the robust growth rates of the economy over the past decade, Bhutan’s dependence on imports, its narrow tax base, large dependence on hydropower revenues, and low levels of productive employment make self-reliance a major development target for the country. In addition to self-reliance, as a crosscutting principle the FYP also calls for the adoption of rigorous environmental standards and mainstreaming of green or carbon-neutral strategies in all activities, specifying the promotion of electric vehicles as a strategy to address environmental issues and reduce dependency on fossil fuel.

Energy Sector and Hydropower [1]

The energy sector is very important for the development of Bhutan and has been a primary focus in recent FYPs. In particular the development of hydropower has been driving economic growth and is currently a key source of income, accounting for about one-fifth of Bhutan’s GDP and about 30 percent of total government revenues (International Monetary Fund 2014). Bhutan has an estimated hydropower potential of 23,760 megawatts (MW) with a mean annual energy production capability close to 100,000 gigawatt-hours (GWh). At present, the installed hydropower capacity is about 5 percent of the total potential (Gross National Happiness Commission, Royal Government of Bhutan 2013). Electricity tariffs are the lowest in the region, and a free electricity program for the first 100 units is being implemented from 2013 to 2015 to encourage rural communities to use electricity instead of firewood because of environmental and health concerns (Gross National Happiness Commission, Royal Government of Bhutan 2013).

Urban Development

Bhutan is undergoing a profound and rapid demographic transition from a largely subsistence, rural economy to an urban society. The 2008 National Urban Strategy (NUS) assumed as the most likely scenario that by the year 2020 the nation will be 60 percent urbanized, adding an estimated 250,000 urban dwellers compared to the 30.8 percent urbanization level in 2005. The cities Thimphu and Phuentsholing are the two most popular destinations for urban migrants. Thimphu, the capital and main city, has already experienced a rapid increase in its urban population, which was followed by a rapid expansion of its urban extension; by 2040, the city is expected to again have doubled its population. Phuentsholing is an industrial hub linking Bhutan with its neighbor India. In anticipation of the growth of the urban population, levels and quality of infrastructure and services would need to be increased.

Urban Transport

In recent years and following the rapid urbanization rate, urban transport has undergone significant changes. Between 1990 and 2010, the number of Bhutanese living in urban areas nearly tripled, and rates of motor vehicle ownership have increased along with this trend. This has led to traffic congestion, particularly in the main urban areas such as Thimphu, as well as to other impacts on the urban environment such as increased emissions and reduced pedestrian safety. Bhutan’s urban transport systems are still developing to meet the increasing demand for urban mobility. As of September 2014, total vehicle registration was 68,744 in Bhutan, with an estimated 38.4 percent of registrations in Thimphu Dzongkhag2 based on the household ownership rate. During 2008 to 2012, the motorization rate grew about 12 percent per year, with an average of about 6,300 newly registered vehicles each year. Appendix A includes more detail about urban transport in Bhutan.

Global EV Initiatives and the Context of the Bhutan EV Initiative

EV technology has only recently been introduced to the global market, and the EV initiative of the RGoB will be one of the first in the emerging markets. Internationally, countries have initiated EV policies with a mix of objectives, such as to enhance energy security, reduce GHG emissions and local air pollution, and promote domestic car industries. In fact, EV initiatives in the five countries with the highest EV stock by the end of 2014 (China, Japan, the Netherlands, Norway, and the United States) are driven by clear strategic policy objectives or national mandates. Among this top five, three countries—China, Japan, and the United States—are global leaders in auto manufacturing with clear strategic reasons to invest in research and development (R&D) to maintain their industry’s competitive advantage. In comparison, European countries are driven more by their climate and environment policies with committed targets for GHG emission reduction. The Norwegian government, for example, has adopted a target to reduce average carbon dioxide (CO2) emissions for new passenger cars to 85 g/km by 2020 in order to meet a target of reducing GHG emissions in the Norwegian transport sector by 2.5–4 million tons. EV initiatives are also used by local governments such as those in Beijing, California, and London to address

Notes

1. The information about hydropower is drawn from the Green Growth Report.
2. Thimphu Dzongkhag refers to the administrative district that includes Thimphu City.

Cite This Article:

Zhu, Da, Dominic Pasquale Patella, Roland Steinmetz, and Pajnapa Peamsilpakulchorn. 2016. The Bhutan Electric Vehicle Initiative: Scenarios, Implications, and Economic Impact. Directions in Development. Washington, DC: World Bank. doi:10.1596 /978-1-4648-0741-1. License: Creative Commons Attribution CC BY 3.0 IGO

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References

Gross National Happiness Commission, Royal Government of Bhutan. 2013. Eleventh Five Year Plan Volume I: Self Reliance and Inclusive Green Socio-Economic Development. Thimphu, Bhutan: Gross National Happiness Commission, Royal Government of Bhutan.
International Monetary Fund. 2014. 2014 Article IV Consultation—Staff Report; Press Release; and Statement by the Executive Director for Bhutan. International Monetary Fund Country Report 14/178. Washington, DC: International Monetary Fund.

World Bank. 2014. Bhutan—Development Update. Washington, DC: World Bank.

This work is made available by "World Bank" under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http:// creativecommons.org/licenses/by/3.0/igo
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