Bhutan - Hydropower Export Boom: Its Macroeconomic Impacts and Policy Implications

Kojo, Naoko

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Abstract

Bhutan has shown remarkable economic performance over the last two decades. Growth during the second half of the 1990s was particularly strong, with annual Gross Domestic Product (GDP) growth averaging 6.5 percent. A large part of this performance has been supported by generous inflows of foreign aid and buoyant electricity exports to India, which have spurred growth both directly by expanding export earnings and indirectly by stimulating investment in the construction and transport industries. Growth prospects for Bhutan look bright, supported by enormous hydropower generation potential. In particular, the scheduled commissioning of the Tala hydropower project in 2005/06 is expected to give a major boost to growth by tripling the country's power generation capacity. While the expansion in power exports has brought significant benefits to Bhutan, there has been concern that it may not be an 'unmitigated blessing.' Despite large net inflows of foreign capital, Bhutan's macroeconomic indicators suggest that inflation has so far been modest and under control. The results of the empirical analysis of the Bhutanese economy indeed confirm that the power exports to India as well as financial assistance have caused real appreciation of the ngultrum against the rupee over time, through increased private spending and short-term monetary disequilibrium. Despite the real appreciation, however, the study finds little evidence to suggest contraction or stagnation of the non-power tradable sector. While the performance of the tradable sector may have been stronger in the absence of the real appreciation, thus far there is no sign of the Dutch disease, or the Dutch condition, in the Bhutanese economy. This paper examines empirically the macroeconomic impacts of Bhutan's increased power exports to India. It is the first serious attempt to address the presence of the Dutch disease in the Bhutanese economy. Previous attempts had been hampered by lack of sufficiently long time series data. Four sets of key questions are addressed in this study: (i) what are the features of the power export boom in Bhutan? Is it a temporary or permanent phenomenon? How large are power exports? (ii) Have power exports appreciated the real value of the ngultrum? If so, would further increase in power exports put further upward pressure on the ngultrum? (iii) What have the impacts on the tradable sector been? Are there Dutch-disease symptoms? (iv) Are these impacts sizable enough to require policy interventions? If so, what kind of policy options is then available to the Government?

Document type: Other
Publisher: The World Bank
Place of Publication: Washington, D.C.
Date: 2002
Version: Secondary publication
Date Deposited: 18 September 2015
Faculties / Institutes: Miscellaneous > Individual person
DDC-classification: Economics
Controlled Subjects: Bhutan, Wasserkraft, Export
Uncontrolled Keywords: Bhutan, Wasserkraft, Energieerzeugung, Export / Bhutan, Hydro Power, Power Generation, Export
Subject (classification): Science and Technology
Economics
Countries/Regions: Bhutan
Additional Information: © World Bank. https://openknowledge.worldbank.org/handle/10986/15474 License: CC BY 3.0 Unported
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