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Briefing Notes on Bhutan

Construction of hydropower projects accelerate growth

	Bhutan's GDP growth rose dramatically from 5.5% in 2006 to 17.6% in 2007. The spike in growth reflected private investment in housing, public investment in infrastructure and, most importantly, continued work on the Tala hydropower project.
	The construction of such projects has governed the rhythm of economic activity in Bhutan for several years, and will likely continue to determine it for several more. Services maintained robust performance in 2007, driven chiefly by the trade and financial sectors.
	In Bhutan the construction of two new hydropower projects will help to sustain real GDP growth over the medium term. GDP is expected to grow at about 10% in 2008.
	Inflation rates remained high in most countries of South Asia as a result of pressures from both the demand and supply sides. Higher prices of oil and other commodities in international markets sustained inflationary pressures. Food prices in general rose more rapidly, imposing extra burdens on low and fixed income groups. Price changes in Bhutan largely follow those in India, a country with which it has close trade and financial links. The domestic currency is pegged to the Indian rupee. Inflation in Bhutan has hovered around 5% in recent years.
	Bhutan's overall budget deficit, excluding income from grants, is quite large. If grants are included it becomes more manageable. The budget deficit including income from grants rose to 3.5% of GDP in 2007, from 0.8% in 2006. With the Tala hydropower project coming on stream, a significant increase in government revenue is expected to lower the deficit.
	Bhutan's trade balance improved in 2007, with large exports of electricity to India and much of the Tala hydropower project coming on stream. The country's current account balance turned to a surplus over the year, and is expected to remain in surplus in the near future.
	The main challenge for countries in South Asia is to sustain their growth momentum in the face of high oil prices. Very high oil prices will not only compromise economic growth but add pressures on inflation, budget and balance of payments. In such a situation, it is important that some measures are taken to hedge the risk of high oil prices and more importantly to contain oil imports through selective energy conservation measures.

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Addressing the neglect of agriculture - two-pronged approach needed

	The rural poor account for around 70% of the poor in the Asia-Pacific region, and agriculture is their main livelihood. Another worrisome trend is the widening gap between the rich and the poor because the benefits of growth are not shared equally by different sectors, regions or income groups. Agriculture appears neglected, even though it still provides jobs for 60% of the working population and generates about a quarter of the region's GDP. Growth and productivity in agriculture are slowing, and the green revolution has bypassed millions. In South Asia, growth in agriculture output dropped from 3.6% in the 1980s to 3.0% in 2000-2003.
	Agricultural labour productivity has a significant impact on poverty reduction. ESCAP estimates show that a 1% increase in agricultural productivity would lead to a 0.37% drop in poverty in the Asia-Pacific region. Given the large agriculture productivity gaps among countries in the region, the potential gains appear substantial. Raising the region's average agricultural productivity to that in Thailand can take 218 million people out of poverty, roughly a third of total poor in the region. Large gains in poverty are also possible through comprehensive liberalization of global agriculture trade, which could lift a further 48 million people out of poverty in the region.
	Therefore, a policy priority should be to revitalize agriculture. This requires connecting the poor to markets by improving rural infrastructure, improving availability and management of water, improving agricultural technology, increasing the capacity to adapt technologies, and speeding diversification and commercialization. It also requires improving the distribution of land and the access to agricultural credit and extension - and making macroeconomic policy friendlier to agriculture, all enabling the poor to make a dent on poverty by themselves.
	While agriculture growth will help in reducing poverty particularly in rural areas, yet some poor will shift from agriculture to industry and services, which offer them a better chance of escaping poverty. Policies should be put in place to make this transformation easy. Public policy could thus adopt a two-pronged approach, taking both aspects into account; revitalizing agriculture while facilitating the migration of excess labour from agriculture to industry and services. Farmers can leave agriculture for non-farm activities in rural areas or for work in urban areas. This requires creating opportunities in the non-farm sector as well as urban planning. Both require better opportunities for skills development and strategies for raising overall economic growth.

Source: The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) 2008

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Information on Bhutan

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The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)