Bhutan's Current Account Deficit

Bhutan's current account deficit widened dramatically in the early 2020s, reaching approximately 30 per cent of gross domestic product (GDP) by 2023 — one of the highest current account deficit-to-GDP ratios in the world. The deficit reflects the structural characteristics of Bhutan's small, open, landlocked economy: heavy dependence on imports for both capital goods (particularly hydropower construction materials and equipment) and consumer products, a narrow export base dominated by hydropower electricity sales to India, and the slow recovery of tourism revenue following the COVID-19 pandemic. Managing this deficit while maintaining macroeconomic stability is one of the central economic policy challenges facing the Royal Government of Bhutan.^[1]

The current account measures the difference between a country's total exports of goods and services (plus income and transfer receipts from abroad) and its total imports (plus income and transfer payments abroad). A persistent deficit indicates that a country is spending more internationally than it earns, financing the gap through borrowing, foreign investment, or drawdowns of reserves. For Bhutan, the deficit is intimately linked to the country's hydropower development strategy, which requires massive upfront capital imports financed primarily by Indian government loans, with repayment expected from future electricity export revenues.^[2]

Structure of the Current Account

Trade Balance

Bhutan's merchandise trade balance has been persistently negative. The country imports a wide range of goods — fuel, vehicles, machinery, construction materials, food products, pharmaceuticals, and consumer electronics — primarily from India, which accounts for over 80 per cent of Bhutan's bilateral trade. Exports are dominated by electricity from hydropower plants, along with smaller volumes of ferro-silicon, cement, calcium carbide, cardamom, and other agricultural products. While hydropower exports to India generate significant revenue, they are insufficient to offset the total import bill, particularly during periods of intensive hydropower construction when capital goods imports surge.^[3]

The trade deficit widened sharply from 2021 onwards as construction accelerated on several major hydropower projects, including the 2,585 MW Punatsangchhu-I and 1,020 MW Punatsangchhu-II projects, the 720 MW Mangdechhu project (completed), and the planned 2,560 MW Sankosh project. These projects require importing turbines, generators, cement, steel, and heavy machinery — almost entirely from India — on a scale that dwarfs the country's other trade flows. At the peak of construction activity, hydropower-related imports can represent 20–30 per cent of total imports.^[1]

Services Balance

The services balance is heavily influenced by tourism, which was historically Bhutan's second-largest source of foreign exchange after hydropower. The COVID-19 pandemic devastated tourism from 2020 to 2022, with international arrivals dropping to near zero during border closures. The subsequent recovery has been slower than anticipated, partly due to the government's decision in September 2022 to raise the Sustainable Development Fee (SDF) from US$65 to US$200 per person per day. While the higher fee was intended to promote high-value, low-volume tourism aligned with sustainability goals, it led to a significant decline in visitor numbers. In 2023, tourist arrivals recovered to approximately 100,000 — well below the pre-pandemic peak of nearly 316,000 in 2019. The government reduced the SDF to US$100 per day in September 2023 in an effort to boost arrivals.^[4]

Income and Transfers

The income balance is affected by interest payments on Bhutan's external debt, which is substantial. Total external debt stood at approximately 120 per cent of GDP as of 2023, with the majority owed to the Government of India for hydropower project financing. While these are concessional loans at below-market interest rates, the debt service payments still represent a significant outflow. On the transfer side, inward remittances from Bhutanese working abroad — particularly in Australia — have grown substantially, reaching an estimated US$342.9 million by 2023. This remittance flow partly offsets the current account deficit but also reflects the emigration challenge facing the country.^[3]

Hydropower Debt and the Current Account

The relationship between hydropower development and the current account deficit is central to understanding Bhutan's macroeconomic position. Bhutan's hydropower sector operates under a distinctive bilateral model: India finances the construction of hydropower plants in Bhutan through a combination of grants and concessional loans, and Bhutan sells the generated electricity to India at negotiated tariff rates. The revenues from electricity exports service the debt and, once the loans are repaid, generate substantial government revenue. This model has been the foundation of Bhutan's economic development since the commissioning of the Chhukha Hydropower Plant in 1988.^[2]

However, the model creates a cyclical pattern in the current account: during construction phases, imports surge and the current account deficit widens dramatically; during operational phases, electricity export revenues flow in and the deficit narrows. The current widening of the deficit to approximately 30 per cent of GDP reflects the simultaneous construction of multiple large projects. Economic analysts and the International Monetary Fund (IMF) have noted that while the deficit is structurally linked to productive investment (rather than consumption), it nonetheless creates macroeconomic risks — including pressure on foreign exchange reserves, vulnerability to construction delays or cost overruns, and exposure to changes in Indian energy policy or tariff negotiations.^[2]

The delayed completion of the Punatsangchhu-I project — originally scheduled for 2016 but repeatedly postponed due to geological complications — illustrates the risks inherent in this model. Cost overruns have inflated the project's budget significantly, increasing the associated debt burden without generating the expected revenues on schedule. Such delays extend the period of high current account deficit and complicate fiscal and monetary management.^[1]

Foreign Exchange Reserves and Financing

Bhutan's foreign exchange reserves, managed by the Royal Monetary Authority of Bhutan (RMA), provide a buffer against external shocks and finance the current account deficit. As of 2023, gross international reserves stood at approximately US$580 million, equivalent to roughly 10–12 months of merchandise imports (excluding hydropower-related imports, which are largely financed directly by Indian credit lines). While this reserve level is adequate by conventional metrics, the RMA has expressed concern about the pace of reserve depletion during periods of high import demand and low tourism earnings.^[3]

The current account deficit is financed primarily through capital inflows: Indian government loans for hydropower projects (which appear as capital account inflows offsetting the trade deficit), bilateral and multilateral development assistance, and, increasingly, remittance transfers. Foreign direct investment (FDI) into Bhutan remains minimal, reflecting the country's restrictive FDI regime, small domestic market, and geographic isolation. The Bhutanese ngultrum is pegged at par to the Indian rupee, which simplifies bilateral trade but constrains monetary policy independence and makes Bhutan susceptible to Indian inflationary pressures.^[2]

Policy Responses

The Royal Government has pursued several policy responses to manage the current account deficit and its associated risks. Import management measures have included restrictions on vehicle imports, luxury goods taxation, and encouragement of domestic production through the "Made in Bhutan" initiative. The government's economic diversification agenda — encompassing the Gelephu Mindfulness City special economic zone, information technology sector development, organic agriculture promotion, and cottage industry support — aims to broaden the export base beyond hydropower and reduce import dependence over the medium term.^[5]

The 13th Five Year Plan (2024–2029) identifies current account management as a cross-cutting priority, with targets for export diversification, import substitution, and tourism revenue recovery. The plan also envisions reforms to the FDI regime to attract productive investment in manufacturing and services, though the government has emphasised that any liberalisation will be consistent with environmental sustainability and cultural preservation objectives.^[5]

The IMF's Article IV consultations with Bhutan have recommended continued fiscal prudence, strengthening of the financial sector's capacity to intermediate domestic savings, cautious management of hydropower debt, and gradual diversification of export markets beyond India. The Fund has also advised greater exchange rate flexibility in the long term, though the ngultrum-rupee peg remains a politically and economically sensitive topic given the depth of Bhutan's economic integration with India.^[2]

Outlook

The trajectory of Bhutan's current account deficit will depend on several factors: the completion timeline and commissioning of ongoing hydropower projects (which will shift the balance from imports to exports), the recovery of tourism under the revised SDF regime, the success of economic diversification initiatives, the pace of emigration and its impact on remittance flows, and the evolving terms of Bhutan's economic relationship with India. As Bhutan navigates the post-LDC graduation landscape with reduced access to concessional financing, prudent management of the current account will be essential to maintaining macroeconomic stability and sustaining the country's development trajectory.^[1]

References

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