Bhutan's Economy to Grow 7.4% on Hydropower, Tourism; IMF Warns of Crypto Risks

Inflation is expected to converge toward 4 per cent, anchored by the currency peg and the high import content of investment, according to the IMF Executive Board, which concluded its 2025 Article IV consultation with Bhutan under its lapse-of-time procedure.

The IMF stated that Bhutan's medium-term growth outlook continues to be positive, supported by expanding hydropower generation and continued public investment.

At the same time, the IMF mentioned that the risks are tilted to the downside, including delays in hydropower projects, a global slowdown, volatility in crypto-asset holdings, rising fuel prices, and climate-related shocks.

The Fund said tighter fiscal and monetary policies, along with stronger financial sector supervision, are essential to rebuilding buffers and safeguarding macroeconomic stability.

Bhutan's economic recovery gained momentum in 2024 and early 2025. Real GDP growth accelerated sharply toward the end of 2024, reaching 9.1 per cent in the fourth quarter, and remained strong in the first half of 2025. Growth was supported by a rebound in industry, resilience in services and the commissioning of major hydropower projects.

Inflation declined steadily through most of 2024 as food and non-food pressures eased, stabilising below 2 per cent by mid-year. It later rebounded toward 4 per cent in 2025, driven largely by food inflation.

The IMF said the Gelephu Mindfulness City project has the potential to attract foreign investment and support diversification, but it also carries fiscal and financial risks that will require careful management.

The Executive Board said a gradual but sustained fiscal consolidation is appropriate to meet Bhutan's medium-term deficit target, preserve space for growth-enhancing capital expenditure and place public debt on a downward path.

The Fund welcomed Bhutan's commitment to a fiscal deficit of 3 per cent under the current five-year plan and progress in revenue reforms.

However, it warned that indirect tax revenue gains may stall. Higher GST rates, the introduction of fuel taxes and tighter spending discipline remain essential to support fiscal objectives.

On monetary policy, the IMF said gradual normalisation is needed to support reserve accumulation. Excess liquidity should be absorbed to moderate credit growth and strengthen monetary transmission, including through the development of the interbank market.

The Fund stressed the importance of strengthening financial sector resilience. The adoption of Bhutanese accounting standards will require higher provisioning, particularly for restructured loans. Authorities were urged to improve risk-based supervision, stress testing and enforcement of prudential norms.

Bhutan's external position improved in FY2024/25, with reserves rising, though they remain weaker than levels warranted by fundamentals and policies. Stronger fiscal and monetary stances are needed to further reduce external imbalances.

While endorsing the potential of the Gelephu Mindfulness City initiative, the IMF said its legal and regulatory framework remains at an early stage.

Differences between national regulations and those applied within the city raise concerns about fiscal risks, regulatory arbitrage and financial supervision, especially with crypto-asset activities permitted.

- IANS