Bhutan has shown remarkable economicperformance over the last two decades. Growth during thesecond half of the 1990s was particularly strong, withannual Gross Domestic Product (GDP) growth averaging 6.5percent. A large part of this performance has been supportedby generous inflows of foreign aid and buoyant electricityexports to India, which have spurred growth both directly byexpanding export earnings and indirectly by stimulatinginvestment in the construction and transport industries.Growth prospects for Bhutan look bright, supported byenormous hydropower generation potential. In particular, thescheduled commissioning of the Tala hydropower project in2005/06 is expected to give a major boost to growth bytripling the country's power generation capacity. Whilethe expansion in power exports has brought significantbenefits to Bhutan, there has been concern that it may notbe an 'unmitigated blessing.' Despite large netinflows of foreign capital, Bhutan's macroeconomicindicators suggest that inflation has so far been modest andunder control. The results of the empirical analysis of theBhutanese economy indeed confirm that the power exports toIndia as well as financial assistance have caused realappreciation of the ngultrum against the rupee over time,through increased private spending and short-term monetarydisequilibrium. Despite the real appreciation, however, thestudy finds little evidence to suggest contraction orstagnation of the non-power tradable sector. While theperformance of the tradable sector may have been stronger inthe absence of the real appreciation, thus far there is nosign of the Dutch disease, or the Dutch condition, in theBhutanese economy. This paper examines empirically themacroeconomic impacts of Bhutan's increased powerexports to India. It is the first serious attempt to addressthe presence of the Dutch disease in the Bhutanese economy.Previous attempts had been hampered by lack of sufficientlylong time series data. Four sets of key questions areaddressed in this study: (i) what are the features of thepower export boom in Bhutan? Is it a temporary or permanentphenomenon? How large are power exports? (ii) Have powerexports appreciated the real value of the ngultrum? If so,would further increase in power exports put further upwardpressure on the ngultrum? (iii) What have the impacts on thetradable sector been? Are there Dutch-disease symptoms? (iv)Are these impacts sizable enough to require policyinterventions? If so, what kind of policy options is thenavailable to the Government?
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