Publication: Bhutan - Hydropower Export Boom : Its Macroeconomic Impacts and Policy Implications
Date
2002-09
ISSN
Published
2002-09
Author(s)
World Bank
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?
Citation
“World Bank. 2002. Bhutan - Hydropower Export Boom : Its Macroeconomic Impacts and Policy Implications. © Washington, DC. http://openknowledge.worldbank.org/handle/10986/15474 License: CC BY 3.0 IGO.”