IMF Executive Board Reviews Bhutan Economic Outlook

The Executive Board takes decision under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.[1] The authorities have consented to the publication of the Staff Report prepared for this consultation (footnote: select option 1)./The authorities have not consented to the publication of the Staff Report prepared for this consultation (footnote: select option 2)./The authorities need more time to consider the publication of the Staff Report prepared for this consultation (footnote: select options 3 or 4).[2]

Bhutan has continued to make notable strides in social development while upholding its strong commitment to environmental sustainability. Extreme poverty was eliminated by 2022, inequality has declined, and the country successfully graduated from the UN’s Least Developed Country category in December 2023—though this transition also implies a gradual reduction in official development assistance. Bhutan remains a global environmental leader, maintaining more than 60 percent of forest cover and pledging to remain carbon neutral. 

The economic recovery gained momentum in 2024 and early 2025, supported by broad-based growth and easing inflation. Real GDP growth accelerated sharply toward the end of the year—reaching 9.1 percent in Q4—and remained strong in the first half of 2025. Key growth drivers were a rebound in industry, continued resilience in services, and the commissioning of major hydropower projects. Inflation, which had declined steadily through most of 2024 as food and non-food pressures eased, began to stabilize below 2 percent toward mid-year. However, it rebounded towards 4 percent in 2025, driven by food inflation. The tourism recovery continued to strengthen under the “high value, low volume” strategy, with tourist arrivals rising by 41 percent and tourism receipts expanding by 35 percent, aided by a growing share of higher-spending non-Indian visitors. At the same time, vulnerabilities persisted: youth unemployment remained elevated, execution of capital spending was slower than planned, and the current account—though improving—remained in significant structural deficit. Nonetheless, foreign reserves strengthened markedly, supported by lower crypto-mining related imports, rising remittances, and higher tourism and hydropower earnings. 

The medium-term outlook is favorable, with growth expected to remain strong on the back of rising hydropower generation and continued capital investment. Over time, however, sustaining high and inclusive growth will require expanding the economy beyond hydropower and low-productivity activities to create more private-sector jobs and reduce outward emigration pressures, particularly among youth. The GMC project has the potential to attract investment and support diversification, though it also carries fiscal and financial risks that will require careful management. Strengthening the financial sector will be important to support these objectives and ensure an adequate flow of credit to emerging sectors. 

Uncertainty remains elevated, with risks broadly tilted to the downside. Domestically, delays in completing major hydropower projects would dampen output and revenues, while the GMC initiative poses fiscal and financial risks. Its independent tax regime could erode the national tax base, crowd out pro-growth public investment, and generate additional contingent liabilities for the general government. GIDC finances and RMA assets are exposed to declines in crypto-asset values. Externally, Bhutan remains vulnerable to other global risks, including fuel-price volatility, climate-related shocks (such as glacial lake outburst floods), and a global slowdown that could weaken tourism and non-hydro exports. 

Executive Board Assessment

Growth is expected to remain robust over the medium term, supported by hydropower commissioning and continued capital spending. With Punatsangchhu II fully operational and investment under the 13th FYP progressing, medium-term activity will be driven by rising electricity production and a steady recovery in services, including tourism. Inflation is projected to stabilize around 4 percent, anchored by the currency peg and the high import content of investment.

A gradual but sustained fiscal consolidation is appropriate to achieve the authorities’ medium-term deficit target, allow for pro-growth capital expenditure, and put public debt in a downward trajectory. The authorities have made significant progress in fiscal policy reforms aimed at improving revenue efficiency and their commitment to a fiscal deficit of 3 percent over the FYP is welcomed. However, indirect tax revenue buoyancy stemming from the reform will likely stall. Higher GST rates, which remain low for international standards, combined with other tax policy measures such as the introduction of fuel taxes, and tighter expenditure discipline, remain essential to support fiscal objectives, while allowing space for spending priorities, including pro-growth capital spending. The new financing model for hydropower projects brings new opportunities for Bhutan to materialize its production potential but must be properly managed to mitigate fiscal risks.

Monetary policy needs to be gradually normalized to support reserve accumulation, supported by a strengthened monetary policy framework. The excess liquidity should be absorbed to moderate credit growth and reinforce monetary transmission, including by supporting the development of the interbank market. The implementation of the domestic liquidity management framework is key to improving short-term liquidity management, and staff encourages the authorities to move forward toward establishing an interest rate corridor.

Strengthening the financial sector’s resilience is key to safeguarding macroeconomic stability. The authorities’ adoption of Bhutanese accounting standards will introduce an expected-credit-loss approach. This will require higher provisioning particularly for restructured loans. The authorities are rightly focusing on the timely recognition of credit risk, the enforcement of prudential norms, and the mitigation of concentration risks in tourism and housing. They should continue their efforts to strengthen risk-based supervision, enhance stress testing, and to take prompt corrective actions to preserve system soundness. The authorities’ efforts to strengthen the AML/CFT framework are welcomed, but efforts should continue—including improvements on prosecution and conviction.

Bhutan’s external position strengthened further FY2024/25, leading to a notable increase in international reserves, albeit remaining significantly weaker than warranted by fundamentals and policies. Strengthening the fiscal and monetary stance is key to continue reducing the external imbalances and build up reserves. This would mitigate risks from export concentration, reliance on external financing, grants and swap arrangements. The authorities remain committed to increasing reserves further. The Royal Monetary Authority has undertaken significant steps to enhance transparency and governance in reserve management, including a comprehensive internal control assessment of foreign exchange and reserve management systems. They are also working towards implementing the recommendations of recent Fund capacity development mission on reserve management.

While the GMC aims to attract private investment and promote diversification, the legal framework governing its status versus the rest of Bhutan remains at an early stage and needs further clarity on labor, goods, and capital mobility. Financial risks arise from differences between the RMA’s regulations and those adopted by the GMC, raising concerns about regulatory and licensing arbitrage and passporting risks. While the GMC adoption of Abhu-Dhabi Global Market regulations is a positive step towards addressing AML/CFT vulnerabilities, complementary laws and strong implementation remain critical. With crypto-asset activities permitted in the GMC, the importance of strong enforcement and supervision is heightened. In addition, fiscal risks need to be carefully managed to protect Bhutan’s revenue base and limit spending pressures. Addressing these risks is critical to ensure that the GMC’s potential to foster economic diversification and attract FDI fully materializes.