Overview

Latest News on Economy: Economy doing well, January 10, 2004 and Balance of payment sees record growth, January 10, 2004

INTRODUCTION

Bhutan’s economy is wholly dependent on India. It was the benevolent Nehru, who put Bhutan on the path of economic development. As a least developed country Bhutan depends on foreign aids for financing its developmental programmes and establishment costs. India has been the largest donor of external aid to Bhutan and its main development partner. Bhutan’s first Five Year Economic Development Plan (1962-67) was totally funded by India. India has committed Nu/Rs.9000 million ( US $ 215 million) for the current Eighth Plan (1997-2002). Once totally dependent on India for its development assistance and government’s establishment expenses, Bhutan has been increasingly turning to various bilateral, multilateral, and international finances. The United Nations, World Bank, Asian Development Bank, Australia, Austria, Finland, Denmark, Japan, Netherlands, Norway, Canada, Switzerland, Germany, Italy, New Zealand, Sweden, Republic of Korea, United Kingdom and the United States provide foreign aid to Bhutan.

Bhutan’s economy saw a healthy growth in 2002 with the GDP climbing to 7.7 percent in 2002 from 6.6 the previous year, according to the annual report of Bhutan’s central bank, the royal monetary authority (RMA), and the momentum was maintained in 2003. The renewable natural resources sector which includes livestock, forestry, logging and major cash crops like mandarin and apple, continued to dominate the share of the GDP with 33 percent in 2002. It remains the most significant sector, employing about 75 percent of the country’s labour force, the report pointed out. Construction and electricity were also key players in 2002, contributing 17 percent and 9.7 percent. The push on the construction sector was mainly because of large power projects like Tala, Kurichhu and Basochhu. The construction work in the private sector, government and other agencies were increasing and, to an extent, buoyed the GDP growth. Reduction of interest on housing loans is expected to push up construction activities considerably, according to the annual report of the Royal Monitory Authority (RMA), Bhutan's Central Bank, as reported by the government-owned Kuenselonline, January 10, 2004.

The Chukha hydropower project sold Nu 2,171 million worth of electricity to India in 2002. Kurichhu power project sold 97 percent of its electricity to India.

According to the government sources, by the year 2006, Bhutan would be exporting about 6,400 MUs of power annually. The revenue from hydropower projects along with earnings from the other traditional revenue sources could reach about Nu. 15 billion annually.

TRADE

Despite the efforts of diversification, India has been the biggest market for Bhutan’s products and imports. India is not only the major foreign aid contributor to Bhutan’s economic development, but a mainstay for its economic survival. India wholly financed the first two five year economic development programmes. As a landlocked country, India had been and is a major trading partner of Bhutan in her economic development and external trade. Before eighties, third country import and export was non existent in Bhutan. Indian aid accounts for more than sixty percent in its fifth five year economic development plan.

Import: India is Bhutan largest source of imports. The daily necessity of household items like rice, lentils, vegetables, meat, fish, wheat, cooking oil and salt are entirely imported from India. Besides petroleum products, tyres, trucks, cars, CGI sheets, steel, sugar, motor cycles, scooters, medicines and textile goods are some of the main import items from India. 

In 2002, total imports were worth Nu 8,023.7 million, down from Nu 8,990.2 million the previous year, according to the annual report of the Royal Monitory Authority (RMA). The country imported Nu 6,051.1 million worth of goods from India followed by Nu 326.9 million from Japan and Nu 282.3 million from the United Kingdom. Imports from Singapore and Thailand came to a total of Nu 487 million. Import items included fuel, cereals, motor vehicles, machinery and mechanical appliances, metal products, plastic and rubber products, as reported by the government-owned Kuenselonline, January 10, 2004

In 1994, it imported rice valued at Nu 191m from India, which ranked first in its list of import items. The value and percentage of ten major items imported from India in 1995 were as follows: Industrial plants Nu 142m (6%), diesel Nu 136m (5%), alcoholic spirit Nu 75m (3%), petrol Nu 64m (2.4%), vegetable oils Nu 62m (2.3%), refined oils Nu 58m (1.8%), beer 48m (1.8%), trucks Nu 47m (1.8%), charcoal Nu 46m (1.7%), cotton fabrics Nu 42m (1.6%) 

In 1988, Bhutan’s import bill from India was to the tune of Nu 1108.9 million (m) and only Nu 663 m from third countries. Similarly, its import bill from India rose to Nu 1214m but reduced to Nu 249m from third countries in 1989. 

Export: Bhutan exports electricity, horticultural products, cement, canned fruit-products, alcoholic and non-alcoholic beverages, ferro-silicon, calcium carbide, gypsum, marble, dolomite, boulder, cement wood and wood products to India. Bhutan’s total export amounted to Nu 1,042m in 1988. India’s share was 989m and third countries were 53m. Likewise, it exported 985m to India and 146m to third countries in 1989. 

Electricity remained the largest export commodity in 2002. The sales from the export of electricity from the Chukha hydropower project to India was Nu 2,171 million in 2002. Kurichhu power project sold 97 percent of its electricity to India, according to the annual report of the Royal Monitory Authority. Bhutan’s total export was worth Nu 5,261.8 million in 2002, showing a climb of 8.2 percent. The trade was highest with India with total exports of Nu 4,919.1 million followed by Bangladesh with Nu 222.7 million. After electricity, export items included products of chemicals, metal, wood, and processed food, mineral products, textiles followed by stone, cement and asbestos products. According to the report the trade deficit with India continued to grow while with other countries the deficit had fallen by 25.4 percent, as reported by the government-owned Kuenselonline, January 10, 2004

The value and the percentage of the nine major commodities exported to India in 1995 were as follows: Electric energy Nu 721m (23%), calcium carbide Nu 497m (16%), ferro-silicon Nu 340 (11%) Particle boards Nu 329m (10%), cement Nu 278m (9%), saw logs 132m (4%), cardamom 74m (3%), alcoholic drinks Nu 66m (2%), potato Nu 62m (2%). 

Bhutan generated 1,972.18 Million Unit (MU) of electricity in 1995-6. Its export to India was to the tune of 1,564.04 MU at a value of Nu 747.56 million. Since India financed the entire cost of Chuka hydel of about Nu three billion, it paid only 0.50 per unit until 1997. In 1998 the rate of power was revised to Nu 1.00 per unit. Bhutan exports more than 80 percent of its total generation of power to India. 

Foreign exchange reserves : Year 2003 saw Bhutan’s balance of payments record yet another surplus with foreign exchange reserves reaching US $374 million which was sufficient to finance over 23 months of imports. The strong Indian Rupee has also led to the Ngultrum growing in value against the US$ (Ngultrum is pegged to Rupee). The increase in reserve, according to RMA, was mainly propelled by the inflow of loans, grants and foreign direct investment (Nu 117.9 million) largely in the international resort construction in the country, as reported in Kuensel, January 10, 2004. 

Bhutanese currency Ngultrum (Nu) is pegged at par with the Indian rupees. Article 7 of the Bhutan-India Agreement on Trade and Commerce says that the "Trade between Bhutan and India will continue to be transacted in Bhutanese Ngultrums or Indian Rupees." Bhutan pays in rupees even for petroleum products to its advantage, considering the fact, that India itself imports crude oil from the middle east. Again, the Nu is legally tendered at the adjoining Indian areas bordering Bhutan. In these areas trade and commerce are conducted both in Nu and Rupees. 

Bhutan’s minuscule private sector is growing. They are allowed to invest in conjunction with government development plans. The government has retained the control of mega- projects like power projects.

FOREIGN DEBT
As a least developed countries, Bhutan seeks external assistance/debts from India, third countries and multilateral financial organizations. In 1994, the total foreign loans, excluding from India stood at US $ 102.24 million according to the report of Royal Monetary Authority of Bhutan, the central Bank of Bhutan.

In 2002, external debt grew by 40 percent to US$ 405.5 million. Bhutan’s largest creditor remained India with an outstanding debt of US$ 228.7 million followed by Asian Development Bank, US$ 75.8 million, World bank, US$ 42.9 million, and the Austrian government with US$ 34.7 million. Debt servicing was manageable at 4.9 percent of the total export of good and services, Kuensel January 10, 2004 .

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