Bhutan GDP Growth 6.1%, Inflation 4.5% Outlook

JULY 2025

ROYAL MONETARY AUTHORITY OF BHUTAN

JULY 2025

The Royal Monetary Authority of Bhutan prepares the Monetary Policy Statement following Chapter II, Section 10 of the Royal Monetary Authority Act of Bhutan,

1. The Statement is issued annually in July, coinciding with the first month of the new financial year. The Statement highlights recent economic developments and the medium-term macroeconomic outlook. The statistics presented in this Statement are based on Multi-Sector Macroeconomic Framework Coordination Technical Committee (MFCTC) projections, endorsed by the policy-level Macroeconomic Framework Coordination Committee (MFCC).

ACRONYMS

BDBL Bhutan Development Bank Limited BIL Bhutan Insurance Limited BLA Bhutanese Living Abroad BLSS Bhutan Living Standards Survey BoBL Bank of Bhutan Limited BNBL Bhutan National Bank Limited CAD Current Account Deficit CAR Capital Adequacy Ratio CC Convertible Currency CPI Consumer Price Index CRR Cash Reserve Ratio CSIs Cottage and Small Industries DHI Druk Holding and Investment DPNBL Druk PNB Bank Limited DSA Debt Sustainability Analysis DSP De-suung Skilling Program EMDE Emerging Markets & Developing Economies ESP Economic Stimulus Plan FYP Five-Year-Plan GDP Gross Domestic Product GST Goods and Services Tax HICDP High Impact Community Development Projects IMF International Monetary Fund INR Indian Rupee IRC Interest Rate Corridor M2 Broad Money MFCC Macroeconomic Framework Coordination Committee MFCTC Macroeconomic Framework Coordination Technical Committee MLR Minimum Lending Rate MCF Marginal Cost of Funds NFA Net Foreign Assets NPL Non-Performing Loan NSB National Statistics Bureau Nu Ngultrum iii

OMOs Open Market Operations PPN Purchasing Power of Ngultrum PHPA Punatsangchhu Hydroelectric Project Authority RICBL Royal Insurance Corporation of Bhutan Limited RMA Royal Monetary Authority of Bhutan RBI Reserve Bank of India SAR South Asia Region TSA Treasury Single Account USD US Dollars WADR Weighted Average Deposit Rate WALR Weighted Average Lending Rate WEO World Economic Outlook y-o-y Year-over-year

CONTENTS

EXECUTIVE SUMMARY 1

1. Macroeconomic Development & Outlook 1.1 Global Economic Conditions 5 1.2 Domestic Economy 6

2. InflationTrends&Developments    

2.1 Global Inflation Trend 15 2.2 Regional Inflation Trend 16 2.3 Domestic Inflation 17

3. Monetary&FinancialConditions    

3.1 Monetary Policy Development 22 3.2 Monetary Aggregates 23

1. External Sector 4.1 Balance of Payments 28 4.2 Exchange Rate & Remittances Flow 29

5. ChronologyofKeyMonetaryPolicyInterventionsand  MeasuresSince1983       32

EXECUTIVE SUMMARY

In 2024-2025, the global economy demonstrated resilience but faced significant headwinds due to policy uncertainty. The optimism from the International Monetary Fund's (IMF) January 2025 projections was tempered by a sudden escalation in trade tensions, notably the United States' imposition of new tariffs and subsequent retaliatory measures by key trading partners. This led to the highest global tariff rates in a century, reminiscent of the 1930s trade wars, disrupting trade flows, financial volatility, and dampening economic prospects. The IMF World Economic Outlook (WEO) April 2025 revised global growth projections downward to 2.8 percent for 2025 and 3 percent for 2026, below the historical average but above recession thresholds. Advanced economies are expected to grow by 1.4 percent in 2025, while Emerging Market and Developing Economies (EMDEs) are projected at 3.7 percent, with notable downgrades for countries like China affected by trade measures. In contrast, the South Asia Region (SAR) is forecasted to grow by 6.2 percent in 2025 and 2026, supported by India's robust domestic demand and services sector expansion. Global inflation has continued to moderate in 2024 and into early 2025, following the sharp surges seen in 2021-2022. The disinflation process has been driven by easing supply chain pressures, lower energy and food prices, and tighter monetary policies in many major economies. The IMF projects global headline inflation to decline further in 2025, reaching approximately 4.5 percent, down from higher levels in previous years. By 2026, inflation is expected to moderate closer to pre-pandemic averages, though still slightly above the central bank target. The global inflation outlook for 2025-2026 is cautiously optimistic, with most economies expected to see further moderation in price growth. However, risks remain tilted to the downside, and ongoing vigilance in monetary and fiscal policy will be crucial to ensure inflation returns to target without undermining growth. Bhutan's provisional Gross Domestic Product (GDP) growth for 2024 was 6.1 percent, slightly below earlier projections due to delays in the commissioning of major hydropower projects (notably PHPA-II) and lower-than-expected tourist arrivals. The service sector is expected to grow by 4.3 percent in 2025 with the revival of the tourism sector, while public administration services are expected to contract due to wage and provident fund constraints. The industry sector's growth was revised to 19.5 percent for 2025, primarily due to delayed hydropower projects, though electricity generation saw upward revisions owing to higher output from the Nikachhu project and anticipated new capacity from PHPA-II and smaller hydropower projects. Domestic demand surged in 2024, driven by 8.5 percent increase in total consumption, with further growth expected from the implementation of the 13 Five-Year-Plan (FYP), Economic th

Stimulus Programme (ESP), civil service pay reforms, and new hydropower plants. Domestic headline inflation averaged a moderate 2.8 percent in 2024, the lowest since the COVID-19 pandemic. As of March 2025, it rose to 3.5 percent, mainly due to a base effect and modest increase in non-food prices like housing & utilities and transport, which make up over 22 percent of the non-food basket. The moderation reflects a similar trend in India's inflation, averaging 3.5 percent in 2024, driven by fuel price deflation, which helped lower transportation and import costs. Looking ahead, inflation is projected to rise to 4.5 percent in 2025 and 5 percent in 2026, fueled by persistent food inflation from adverse weather and weak farming, alongside stronger demand-side push factors due to increased public investment and a positive output gap. Fiscal management remained prudent, with the FY 2023/24 fiscal deficit at Nu 431.2 million (0.2% of GDP). Domestic revenue collection was strong, covering current expenditures and partially funding capital outlays. However, total public debt rose to Nu 285.2 billion (106.9% of GDP), primarily due to external borrowing for development projects. On the external front, the current account balance is expected to improve over the medium term despite ongoing external risks from global trade uncertainties and financial market volatility. The deficit is projected to narrow from 17.9 percent of GDP in FY 2024/25 to 11.9 percent in FY 2025/26, mainly due to a reduction in the trade deficit driven by increased exports. This includes the anticipated commissioning of PHPA-II hydropower, along with stronger performance in non-hydropower exports such as base metals, ferro-silicon, and forestry products. Although imports are expected to rise, the growth in exports is projected to more than offset this, contributing to an improved trade and current account balance. Bhutan's economy exhibited resilience amid global uncertainty, prudent fiscal management, and financial sector stability. Bhutan's macroeconomic outlook remains broadly positive, but downside risk from external and domestic factors remains high which threatens growth momentum. Key concerns include delays in commissioning major hydropower projects, which could weaken growth and export earnings, a widening fiscal deficit amidst low domestic revenue mobilization, and persistent youth unemployment, particularly among females and exodus overseas emigration. In the financial sector, rising contingent liabilities from expiring loan deferments pose emerging threats to stability, despite strong capital buffers and improvements in Non-Performing Loans (NPLs). Inflationary pressures are expected to rise due to elevated food prices, adverse weather, and growing domestic demand, while Bhutan's limited monetary policy autonomy constrains its response options.

To mitigate these vulnerabilities, the Royal Monetary Authority (RMA) has adopted proactive monetary and macroprudential measures. The RMA announced a post-June loan restructuring plan, which will be the end of blanket loan deferments by June 2025, and introduced a targeted, structured seven- option loan-restructuring framework, with a three-month transition period to support borrowers and preserve financial stability. Currently, RMA maintains an accommodative monetary stance to support growth. The RMA is also transitioning to a market-based monetary policy framework, implementing tools such as Open Market Operations (OMOs) and Marginal Standing Facility (MSF) to absorb excess liquidity and better align policy rates with market conditions. Externally, the recent increase in U.S. trade tariffs has limited direct pass-through to Bhutan, but indirectly, through regional impacts, particularly through India, could be transmitted via higher import prices or disrupted supply chains. Nevertheless, with India's inflation remaining subdued and Bhutan's close trade alignment, near-term inflationary spillovers are expected to be contained. Continued global commodity price volatility, however, remains a key external risk to watch.

Dasho Penjore

GOVERNOR

1. Macroeconomic Development & Outlook Despite sustained global economic resilience since 2020, escalating trade frictions and policy volatility have dampened growth prospects. The IMF nowprojectsglobalgrowthtoslowto2.8%in2025.Domestically,while2024 growthestimateshavebeenreviseddownwardto6.1%(a0.24percentagepoint reduction),theoutlookremainsstrongwithprojectionsof8.9%growthin2025 asthehydropowersectorshowspositiveandrobustdevelopmentmomentum. 1.1GlobalEconomicConditions

The global economy has demonstrated remarkable resilience with sustained growth and stability over the past year, navigating through a series of unprecedented shocks, including the persistent effects of the COVID-19 pandemic, supply chain disruptions, and geopolitical tensions. As per the IMF WEO January 2025, the global economy grew at 3.2 percent in 2024 with a strong recovery in global demand and easing inflationary pressures, particularly in advanced economies, which enabled central banks to begin a gradual shift away from tight monetary policies. However, this momentum has been abruptly clouded by the United States' imposition of new tariffs and the retaliatory countermeasures adopted by its major trading partners like the European Union, China, and Mexico. The protectionist shift, representing the most significant hike in global tariff barriers since the 1930s, is actively fragmenting supply chains, rerouting trade flows, and triggering widespread corporate contingency planning. These disruptions are directly contributing to heightening financial market turbulence, with increased volatility in commodity prices, currency fluctuations, and equity sell-offs in trade- exposed sectors. Considering these ongoing disruptions, the IMF's WEO April 2025 assessment revised its 2025 global growth estimate downward to 2.8 percent (from January's 2025 update of 3.3 percent), explicitly citing trade tension and acute policy uncertainty as primary drivers. Despite the slowdown, global growth is expected to remain above the recession levels but below the historical average of 3.7 percent observed between 2000 to 2019. Similarly, the growth in advanced economies is projected to grow at 1.4 percent in 2025 amid trade and policy uncertainties, tightening of monetary policies to curb inflation, weaker productivity growth, and ageing populations. That said, the growth is projected to slow down to 3.7 percent in EMDEs in 2025 and 3.9 percent in 2026, with significant downgrades for countries affected by recent trade measures, such as China and Mexico.

On the regional front, the World Bank's Global Economic Prospects January 2025 forecasts the growth rate in the SAR to rise to 6.2 percent for 2025 and 2026. This growth is comparatively higher among the EMDE regions. The growth in SAR is largely propelled by India's strong domestic demand, a major catalyst for regional expansion. It is expected that India will maintain the fastest growth rate among the world's largest economies at 6.7 percent for FY 2025/26 and FY 2026/27. In addition to the strong domestic demand, the growth in India will be supported by sustained expansion of the services sector, strengthening of manufacturing activity, credit expansion, and stable inflation. However, despite India's pivotal role in driving regional growth momentum, its economy faces significant vulnerabilities due to the U.S. tariffs targeting electronics, textiles, and engineering goods, threatening India's export-reliant manufacturing upswing, exposing critical vulnerabilities to trade performance. Other countries in the region, including Bangladesh, Sri Lanka, Pakistan, Maldives, and Nepal, are projected to grow between 3 to 5 percent, supported by improved political stability, business sentiment, tourism, industry, and hydropower development. However, the region remains vulnerable to risks such as rising trade tension, geopolitical tensions, commodity price volatility and climate shocks, and weakening global demand. Downward risks to the global outlook include escalating trade tensions, prolonged geopolitical conflicts, and growing debt distress. On the upside, the transition to renewable energy, technological innovation, and sustainable finance provides opportunities.

1.2DomesticEconomy

On the domestic front, the economy is expected to remain robust, supported by a strong rebound in the performance of the hydropower, tourism, and construction sectors, along with a pickup in gross investment in the medium term. Domestic economic growth is projected to grow from 6.1 percent in 2024 to 8.2 percent in 2025, before moderating to 6.8 percent in 2026 (MFCTC Update, April 2025). These positive growth prospects are largely driven by the commissioning of the 1020 MW PHPA-II hydropower project, the construction of two new mega hydropower projects (Kholongchhu and Dorjilung hydropower plants), the relaxation of access to banking credit, and increased government capital expenditure.

The industry sector, which accounts for 35.2 percent of GDP, is projected to increase significantly to 18.6 percent in 2025 and 12.5 percent in 2026 from 8.5 percent in 2024. The strong rebound in

Chart 1.1.1RealGDP&sectoralgrowth the industry sector is underpinned by

strong performance in the electricity 198.2& water, mining & quarrying,

6.815 and construction sectors, together 6.1 5.24.911 expected to contribute an average

of 4.2 percentage points to overall 7

%Change GDP growth. The commissioning of 3

the PHPA-II hydropower and the

-1 construction of Kholongchhu and 2022 2023 2024 (est)2025(proj) 2026(proj)

Dorjilung hydropower plants are

Real GDPServicesAgriculture Industry expected to significantly boost the

performance of the electricity and construction sector, contributing over 27 percent to GDP in the near term. While the tourists arrival is expected to return to pre-pandemic levels by 2027, the services sector is projected to grow moderately at 4.7 percent in 2025 and 4.1 percent in 2026. This steady growth is supported by favourable performance in hotel & restaurant, transport, finance & insurance, and wholesale & retail trade. In contrast, the agriculture sector is projected to slow down from 3.6 percent in 2024 to 2 percent in 2025 and further to 1.4 percent in 2026, due to declining crop production caused by increasing climate unpredictability, erratic weather patterns, human-wildlife conflicts, low productivity, and shortage of manpower. However, the government's efforts to achieve self-sufficiency through investing in the agricultural infrastructure, development of value chains, and measures to mitigate human-wildlife conflict are expected to support the agriculture sector over the longer term. On the demand side, growth is expected to be driven by a revival of gross domestic demand, particularly through increased investment activities. Public investment is projected to grow significantly from negative 22.4 percent in 2024 to 3.9 percent in 2025 and 17.9 percent in 2026, on account of 13 FYP implementation and the th government's continued focus on infrastructure development. Private investment is also expected to remain strong, due to the lifting of the moratorium on housing construction and the government initiative to provide collateral-free concessional loans under the ESP. With the continued implementation of various skilling program initiatives under the De-suung Skilling Program (DSP), job creation initiatives in the 13 FYP, and th a faster recovery of the private sector, the labor market is expected to improve over the medium term. Overall unemployment is expected to remain steady at 3.6 percent in 2025, before marginally declining to 3.4 percent in 2026. However,

youth unemployment continued to remain elevated at 19 percent in 2024, with significantly higher rates among females (20.6 percent). Key factors contributing to the high youth unemployment include a mismatch of skills and labour market needs, limited employment opportunities in the private sector, and reluctance among youth to take up blue-collar jobs are some of the key factors contributing to high youth unemployment (Bhutan Development Update, World Bank, Spring 2025). In terms of sectoral employment, the agriculture sector continues to employ the largest share of the labor force, accounting for over 41 percent in 2024, followed by the service sector at 35 percent and the industry sector at 16 percent. Domestic headline inflation remains moderate, averaging 2.8 percent in 2024, the lowest since the onset of the COVID-19 pandemic. As of March 2025, headline inflation rose to 3.5 percent, an increase of 146 basis points compared to March 2024. This moderation in overall headline inflation was largely driven by disinflation in non-food prices, particularly housing & utilities and transports, which together contribute over 22.3 percent of the non-food basket. The subdued growth in domestic non-food price aligned with the moderation of India's headline inflation, which averaged 3.5 percent in 2024, largely due to deflation in the fuel prices. This has a direct impact on domestic transportation costs and spillover effects to other related sectors, particularly imported goods from India. Going forward, headline inflation is projected to rise to 4.5 percent in 2025 and 5 percent in 2026, with food inflation expected to remain elevated owing to adverse weather events and low commercial farming practices. Additionally, higher aggregate domestic demand, driven by public investment and a higher positive output gap, is expected to exert upward inflationary pressure. While the recent hike in trade tariffs by the US is expected to have minimal effects on domestic inflation, volatility in global commodity prices, particularly fuel and energy prices, resulting from tariff policies and political tensions, is likely to contribute to inflationary pressure. With the projected increase in capital expenditure to accelerate economic activities under the 13 FYP and rising interest payments on public debt, the fiscal deficit th is projected to widen from 2.4 percent (Nu 7,009.7 million) to 6.2 percent of GDP (Nu 21, 438.7 million) for the FY 2025/26, before moderating to 2.3 percent in FY 2026/27.

The total resources for FY 2025/26 are projected at 28.2 percent of GDP (Nu 70,195.2 million) and 27.5 percent of GDP in FY 2026/27. Of the total resources, over 76.5 percent is expected to be contributed by domestic revenue, 23.5 percent by external grants, and the remaining by other

Chart 1.1.2Fiscalbalanceinternal receipts. The mobilization of -0.2tax revenue is estimated to remain less 0 -2.3 -2.440than 14 percent of GDP in the medium -2 -4.7term, indicating a weak tax base and 30 -4 -6.2continued reliance on non-tax sources. 20 -6% of GDP % of GDP

Ongoing fiscal reform initiatives -8 10 such as Goods & Services Tax (GST) implementation, taxation policy, enhanced mobilization of external grants, and expenditure consolidation FY 2024/25 (est.) FY 2025/26 (proj.) FY 2026/27 (proj.)are anticipated to improve the resource Total Resources Total Expenditure Fiscal Balalce_RHS base and support medium-term fiscal sustainability. Total expenditure is projected to increase from 30.6 percent of GDP (Nu 90,444.5 million) in FY 2024/25 to 34.6 percent of GDP (Nu 119,2211.3 million) in FY 2025/26, driven by rising demand for investment activities under the 13 FYP. th Capital expenditure, which accounts for 45 percent of total expenditure, is expected to increase significantly from 13.5 percent of GDP in FY 2024/25 to 17.6 percent in FY 2025/26, mainly due to infrastructure development and investment in human capital. Meanwhile, current expenditure is expected to be fully financed by domestic resources, covering 120 percent, thereby meeting provision of the constitutional requirement. In terms of financing the fiscal deficit, over 79 percent (Nu 17,027.4 million) is anticipated to be raised through domestic borrowings with the issuance of long- term government bonds and short-term 90-day treasury bills. The remaining portion will be financed via external borrowings. However, increased reliance on domestic borrowing poses a risk of crowding out private sector investment. Public debt is projected to increase from 101.7 percent of GDP in FY 2024/25 to 113.9 percent in FY 2025/26, remaining elevated in both the medium and long term. While hydropower-related debt constitutes over 60 percent of total public debt, non-hydro debt is projected to rise due to rising investment activities, but is expected to remain within the threshold of 35 percent of GDP as per the Public Debt Policy 2016. According to the IMF-World Bank's Debt Sustainability Analysis (DSA) Assessment, 2024, Bhutan remains at moderate risk of debt distress.

The current account balance is expected to improve in the medium term, despite persistent external vulnerabilities stemming from rising global trade policy uncertainties and financial market volatility. The Current Account Deficit (CAD) is projected to narrow from 17.9 percent of GDP in FY 2024/25 to 11.9 percent in FY 2025/26, largely attributed to a reduction of the trade deficit to 16.7 percent of GDP in FY 2025/26 from 22.5 percent in FY 2024/25. The projected improvement in trade balance is attributed to an increase in hydropower exports of PHPA-II commissioning, as well as higher exports of non-hydropower such as base metal, ferro-silicon and forestry products. Although imports are expected to increase in the medium term, stronger export performance is likely to more than offset this, thereby improving the overall trade deficit. With the rollout of the 13 FYP and th Chart 1.1.3 Externalsector the construction of new hydropower

50,000 0 projects, capital inflows in the form -10 - of budgetary grants for investment (50,000) -20 -11.9 -13.4 -17.9 and hydropower development are -30 -21.4(100,000)

projected to increase. As a result, the -40-34.5(150,000) capital account balance is expected to rise significantly, by 104 percent in FY 2025/26, from Nu 11,808 million,

FY 2024/25 (est.) supporting banking sector liquidity FY 2025/26 (proj.) FY 2026/27 (proj.)

Financial Account Capital Account and contributing to fiscal sustainability.Current Account CAD in % of GDP_RHS

While the financial account balance is expected to remain volatile in the medium term, an anticipated increase in external borrowings and future borrowing policy directions will play a key role in shaping the path of the financial account balance trajectory. Overall, with improvement in current account balance and positive capital & financial flows, foreign exchange reserves are expected to improve to USD 1,236.9 million in FY 2025/26, covering 32.9 months of essential imports coverage. The monetary policy continued to remain accommodative, maintaining the Cash Reserve Ratio (CRR) unchanged at 8 percent and further softening of the Minimum Lending Rate (MLR) to support economic growth and access to banking credit. To safeguard the pegged exchange rate, the RMA continued to closely monitor credit growth and ensure effective management of foreign exchange reserves. Additionally, the RMA has initiated the development of market-based monetary policy operations to better manage system liquidity and influence market interest rates through the RMA's monetary policy stance. Money Supply (M2) is projected to grow in tandem with economic growth from 1.7 percent in FY 2023/24 to 15.2 percent in FY 2024/25 and 13.2 percent in FY 2025/26, although growth remains below the pre-pandemic levels. Higher growth in money supply is driven by rising Net Foreign Assets (NFA) due to additional inflows

from the commissioning of the PHPA-II hydropower plant and mobilization of external funds for financing planned activities. These capital flows are expected to support the liquidity position and deposits in the banking sector, supporting growth in the money supply. Private sector credit, which constitutes over 85 percent of GDP, is projected to grow from 1.7 percent (Nu 248,813.9 million) to 15.4 percent in FY 2024/25 and 9.8 percent in FY 2025/26. This growth is Chart 1.1.4 CredittoPrivateSector mainly fueled by increased lending to housing construction, manufacturing,

302,000 25and the hotel & tourism sector, which 19.2252,000 20 202,000together constitute around 55 percent of 12.5 15 11.5 10.5152,000 % Change 10total banking credit. The government's 5.4102,000 552,000ESP is also expected to enhance credit 2,000 0access to the agricultural sector and FY 2026/27 FY 2024/25 FY 2025/26 (proj.)(est.) (proj.)other Cottage and Small Industries Credit Outstanding Private Sector Growth (%)(CSIs).

The effective liquidity management is essential for monetary policy operations to calibrate monetary policy in maintaining the pegged exchange rate. Over the period, liquidity position has remained surplus, averaging Nu 12,328 million, and peaking at Nu 32,226 million in FY 2020/21; it has gradually declined to Nu 10,375.7 million in May 2025. Surplus liquidity is projected at Nu 10,247 million in FY 2024/25 and Nu 7,224 million in FY 2025/26, primarily driven by foreign currency inflows from hydropower exports, external grants, and concessional borrowings, as well as growing demand for fiscal deficit financing. However, persistent excess liquidity in the banking sector suggests asymmetric distribution of liquidity within the banking system and reflects an absence of a robust money market. To address this, the RMA is implementing a liquidity management and operational framework. This involves conducting the liquidity operation through OMOs and the MSF. Under these operations, the RMA will calibrate liquidity positions in the economy for absorbing and injecting liquidity in the banking sector by using policy instruments. The shift to market-based monetary policy operations will enable the RMA to more effectively guide its policy stance in order to maintain inflation stability and support overall economic growth. Bhutan's financial sector continues to demonstrate signs of strong resilience and stability, supported by a well-capitalized banking system and improvement in NPLs. As of April 2025, the Capital Adequacy Ratio (CAR) for the overall financial sector remained at 20.4 percent, which is above the regulatory requirements of 12.5 percent. The overall NPL ratio stood at 2.9 percent (without charge off) as of April 2025, as compared to 3.4 percent in April 2024. This is further expected to improve

with the implementation of the NPL Management Regulation 2025 by the RMA. The rising financial contingent liabilities resulting from the expiration of extended loan deferment measures pose significant risks to financial sector stability. Close monitoring and timely policy interventions will be essential to mitigate these emerging vulnerabilities. Despite positive economic growth and an improvement in current account balance, Bhutan's economy remains vulnerable to both domestic and external downside risks. Key domestic risks include potential delays in the commissioning of major hydropower projects, which could dampen growth prospects, rising fiscal deficit amid weak domestic revenue mobilization, increasing financial sector vulnerabilities due to financial contingent liabilities, and inflationary pressure stemming from limited monetary policy autonomy, and the challenge of managing twin deficits. These domestic risks are further compounded by external shocks, notably commodity price volatility driven by prolonged geopolitical tensions, escalating trade tensions, climate risks, and global supply-chain disruptions. These factors could intensify pressure on Bhutan's external balances, foreign exchange reserves, and inflation outlook. Addressing these challenges requires a market based monetary policy, supported by effective liquidity management tools that can respond to economic shocks. In addition, sound macroprudential tools are essential to safeguard financial stability. These include the implementation of capital conservation buffer, Loan-to-Value, Loan-to-Income ratios, as well as the effective management of non-performing loans and mitigation of sectoral concentration risks in credit portfolios. Moreover, advancing efforts in climate change mitigation and adaptation is critical to achieving sustainable and inclusive growth in medium to long-term.

Table1.Medium-TermMacroeconomicOutlook

2024Items 2022 2023 2025(proj) 2026(proj)(est) Production(Supply)*-Growth Real GDP 5.2 4.9 6.1 8.2 6.8 Agriculture -1.1 1.4 3.6 2 1.7 Industry 5.6 0 8.5 16.3 12.5 Manufacturing 6.7 4.4 5.1 5.1 5.1 Electricity & water -1.1 -2.0 9.5 30 7.1 Construction 16.5 -7.2 15.8 24.9 33.1 Services 6.8 7.9 4.8 4.7 4.1

Expenditure(Demand)* Gross domestic demand 13.2 -2.3 3.8 5.6 7.6 Consumption 3.4 5.8 8.5 2.8 7 Public 5.3 1.4 4.5 3.5 4.3 Private 6 7.6 17.6 2.2 6.2 Investment 28.8 -12.7 -3.5 10.6 8.7 Public 2.2 -3.4 -22.4 3.9 17.9 Private 40.3 -15.7 3.3 12.3 6.5 Unemployment rate (%)* 5.9 3.5 3.5 3.6 3.4

FinancialYear(FY) 2022/23 2023/24 2024/25 2025/26(proj) 2026/27(proj) Prices Headline inflation 5.3 3.8 2 4 4.7 Implicit Inflation target/reference 4.5 4.5 4.5 4.5 4.5inflation rate

Fiscal(%ofGDP) Total Resources 25.3 27.2 28.2 28.4 27.5 Total Expenditure 28.8 27.2 30.6 34.6 29.8 Fiscal Balance -4.7 -0.2 -2.4 -6.2 -2.3 Primary Balance -3 1.8 0 -3.1 0.5 Public Debt 116.1 108.3 101.7 113.9 104.4

External(%ofGDP) Current Account -34.5 -21.4 -17.9 -11.9 -13.4 Balance Trade Balance (goods) -26.8 -20.1 -22.5 -16.7 -19 Gross reserves (Million USD) 690 625.4 991.1 1,236.9 1,511.5 Reserves to Essential Import Cov- 15 16.2 24 32.9 41.9erage (Months) External Debt 118.7 100.2 94.7 105.9 98.1 Exchange rate (Nu/USD) 81.4 82.9 83 83.6 84.2

MonetarySector(%Change) Broad Money (M2) 9.7 1.7 15.2 13.1 12.9 Net Foreign Assets (NFA) 37.4 -1.1 27.3 16.2 23 Net Domestic Asset -16.9 3.3 3 9 14.8 o.w Credit to private sector 19.2 5.4 12.5 11.5 10.5 Credit to deposit ratio 80.7 83.9 87.3 85.5 83.1 Credit to GDP 87.9 85.4 85.0 81.3 80.3 External Environment Global GDP* 3.6 3.5 3.3 2.8 3 GDP growth, India* 6.8 5.9 6.5 6.2 6.3 Inflation, India* 5.5 6.1 4.5 3.2 3.1 Memo: Nominal GDP at market prices 238,601 258,254 295,729.1 344,553.8 385,499.7 (Million of Nu)-FY

Data are as of FY ending June unless marked with (*) are in calendar year basis. Source: Macroeconomic Framework Coordinaion Committee (MFCC), Ministry of Finance, April 2025, World Economic Outlook, IMF, April 2025 and Reserve Bank of India (RBI).

2.InflationTrends&Developments

Thecombinedeffectsofmonetarytightening,easingsupplychainbottlenecks, andstablecommoditymarketshasreducedglobalinflationto4.9%(April2025). Thisdisinflationhasspreadregionally,withfoodandnon-foodpricedeclines nowvisiblysofteningBhutan'sinflationtrajectory.

2.1GlobalInflationTrend

In 2022, global inflation reached a multi-decade high at 8.9 percent, and since then it has declined to 6.2 percent in 2023, further declining to 4.9 percent in 2024 as per the IMF WEO April 2025. Furthermore, tighter monetary policies implemented by central banks in advanced economies, easing of global supply chain disruptions, stabilization in commodity prices (energy and food), and the gradual moderation in demand across major economies, the global inflation is further estimated to decline to 4 percent in 2025. Additionally, subdued global demand and improved inflation expectations are contributing to the gradual return of inflation toward the central banks' target. Advanced economies are set to see a swift drop in inflation, falling by 2 percentage points in 2024 and returning to around their pre-pandemic average (2%) by 2025, roughly a year before EMDEs. EMDEs' currencies have depreciated roughly 4 percent on average, translating into higher import costs for food, fuel, and agricultural inputs. In emerging and developing Asia, weak domestic demand and a protracted downturn in China's real estate sector have also driven prices lower, contributing to the moderation of inflation in EMDEs. Energy and food commodity prices, a

Chart 2.1.1Globalkeypriceindicators main driver of inflation, have continued 150350 to ease global headline inflation since 300 250 their 2022 peaks. Oil price shocks, 100200 150 historically responsible for roughly 38 50100 percent of global inflation variation 50 00 between 1970 and 2022, have receded 2021 20222019 2020 2023 2024 2025 2026

Crude Oil USD per barrel (Simple average)_RHS substantially, with Brent crude Commodity Price Index (both fuel & non-fuel) Commodity Food Price Index averaging USD 101 per barrel in 2022 Commodity Fuel Index (Energy)

before falling to USD 83 in 2023 and to USD 78.6 in 2024 (WEO, January 2025 update, IMF). This disinflation reflects ample energy supply, including recovering non-OPEC output and unwinding OPEC+ cuts, alongside weaker demand growth expectations. On the food side, the commodity food price index contracted by 6.8 percent in 2023 and declined to 2.2 percent in 2024 as a result of abundant harvests and high inventories weighing on prices (WEO, April 2025, IMF).

Recent diplomatic talks held in Riyadh in March 2025 yielded a U.S.-brokered maritime security agreement that reinstates safe navigation in the Black Sea corridor and eases sanctions on grain and fertilizer exports amid the Russia-Ukraine conflict and potential disruptions following the expiry of the Black Sea Grain Initiative on July 17, 2023 . Despite the hostilities, Ukraine has largely maintained export 1 volumes via alternative routes, avoiding significant food-price spikes . 2 According to the National Oceanic and Atmospheric Administration, neutral conditions are expected through the Northern Hemisphere summer of 2025, thus reducing the threat of climate-driven crop shocks . As a result, robust harvests, high 3 stock levels, and eased weather-related pressures will help drive down commodity prices in 2025. Similarly, the World Bank has also projected a 12 percent decline in global commodity prices in 2025 and a further 5 percent in 2026, including food and energy.

2.2RegionalInflationTrend

The inflation in Advanced Asia and Emerging and Developing Asia continued to be influenced by a combination of domestic and external factors. On the domestic front, inflation is influenced by elevated food and energy prices, persistent wage pressures, and lingering supply-side constraints, while on the external front, global commodity price volatility, trade tensions, and currency depreciation pressures contributed to inflationary trends (WEO, April 2025, IMF). In 2024, the annual average inflation rate in Emerging and Developing Asia was recorded at 2.8 percent, slightly lower than the projected 2.9 percent. The countries, such as China and Thailand, also saw low inflation during the same year. The low inflation in China was fueled by the property sector adjustment, weak commodity prices, a large output gap, and high local government debt and 4 policy environment . 5 Similarly, in Thailand, a decline in inflation was determined by falling global food and oil prices and weak domestic demand, easing of monetary policy and strong 6 7 export performance. Whereas, for other Emerging Developing Asia countries, the currency pressure remained elevated due to persistent US dollar strength and capital outflows.

More information on Black Sea Initiative can be found here https://www.politico.com/news/2025/03/25/us-black-sea-russia-1 ukraine-00247417 & https://www.reuters.com/world/europe/russia-gets-us-agree-help-lift-curbs-food-fertilizer-shipping-2025-03-25/ More information can be found here https://www.csis.org/analysis/does-ukraine-need-new-black-sea-grain-initiative  https://www.cpc.ncep.noaa.gov/products/analysis_monitoring/enso_advisory/ensodisc.shtml  High levels of government debt and reduced revenue from land sales have constrained local government spending, contributing downward 4 pressure on prices. China's monetary policy remained accommodative to counter low inflation, but structural issues like a declining labor force and property 5 sector challenges outweighed stimulus effects, as per the IMF blog by Krishna Srinivasan (April 29, 2024). As per the ADB's "Economic Forecasts for Asia and the Pacific, December 2024", the declining global commodity prices, especially for food 6 and energy, have eased inflationary pressures across Southeast Asia, including Thailand. As per the ADB Outlook report, when the US Federal Reserve cut its rate in September 2024, Thailand's central bank had room to adopt a 7 more accommodative stance, keeping inflation low.

In South Asia, Bangladesh experienced high inflation in 2024 at 9.7 percent, driven by political instability,

Chart 2.1.2 Regional price currency depreciation and supply-side 8

disruption. In contrast, India and Nepal 12 recorded a decline in inflation at 4.7 8 percent and 5.4 percent, respectively,

4 supported by tighter monetary 0 policy, better anchoring of inflation

expectations in India, and favourable -420222023 20242019202020252021food production, particularly tomato

Emerging Developing Asia China Thailand and potato.

As compared to 2023, the inflation in Nepal was recorded at 5.3 percent in 2024. The inflation in Nepal was largely linked to political uncertainties and weak market oversight on food prices , 9 Chart 2.1.3 Regional priceimports from India, and currency

12adjustment. As of mid-December

2024, Nepal's CPI (y-o-y) rose to 6.1 9 percent from 4.9 percent a year earlier,

6marking a 15-month high, driven by

a significant surge in food prices such 3 2025 2021 2019 2020 2022 2023 2024as vegetables, pulses & legumes, and

Bangladesh India Nepalcereals.

As of December 2024, India's headline inflation fell to 5.2 percent, a four-month low, staying within the Reserve Bank of India's (RBI) inflation target range. The decrease was due to a disinflation in food prices and fuel, which saw continued deflation at negative 1.4 percent over the period. 10

2.3DomesticInflation

Domestic inflationary pressures subsided as compared to the past two years, with the inflation stabilizing around 2 percent in Q3 2024 and hovering below the average of 5 percent throughout the year . As of April 2025, y-o-y headline 11 inflation contracted to 2.5 percent from 4.9 percent, significantly contributed by the non-food price index declining to negative 0.9 percent from 4.3 percent in April 12

1. The decline in non-food inflation was driven largely by a fall in the price The Bangladeshi Taka depreciated by approximately 10 percent against the US dollar, making imports more expensive and fueling inflation. 8 More can be read here https://www.observerbd.com/news/504436 Vegetable prices soared by over 43 percent and pulses and legumes saw a rise of approximately 10.66 percent. More can be read here https://9 asianews.network/food-prices-are-on-the-rise-again-in-nepal-heres-a-look-at-the-reasons/ The Press Information Bureau and more can be read at https://pib.gov.in/PressReleaseIframePage.aspx?PRID=209247710 The data and analysis are based on the monthly CPI published by the National Statistics Bureau (NSB). The CPI basket has 169 items (500 11 varieties) and the weights are based on the Bhutan Living Standards Survey 2022. The price reference period for the new CPI is April 2024. The weight of food inflation stands at 51.28 percent while non-food constitutes 48.72 percent in the overall CPI basket. Under the food 12 index, the highest weight assigned is in bread & cereals (9%), vegetables (8.9%), and milk, cheese, and eggs (7.12%). For the non-food index, transport constitutes (9.8%), followed by housing, water, electricity, and gas (12.4%) and clothing & footwear (5.6%).

of housing & utilities, and transport. The pass-through effect of global fuel price moderation may have contributed to the decline in transport prices in Bhutan. Starting in 2021, food inflation began to decelerate sharply, averaging 5.5 percent over the period. The highest food inflation was recorded at 16.9 percent in February 2021, and the lowest at 0.6 percent in March 2023, and thereafter it started to rise, averaging at 2.9 percent in 2024. Conversely, non-food inflation exhibited stable growth, averaging at 4.3 percent over the period, with recording highest at 7 percent in November 2021 and lowest at negative 1.2 percent in October 2024. From early 2022 to 2023, after the COVID-19 pandemic relaxation, overall headline, food, and non-food inflation oscillated within a narrow band ranging between 5 and 7 percent.

Chart 2.2.1Headlineinflation

12 8 4 0 -4 Jun-22 Jun-23 Feb-23 Jun-24 Jun-21 Oct-22 Oct-23 Feb-24 Oct-24 Oct-21 Dec-21 Feb-22 Apr-22 Apr-23 Apr-24 Dec-24 Feb-25 Apr-25 Apr-21 Dec-22 Aug-23 Dec-23 Aug-21 Aug-22 Aug-24 Food Overall Non-Food

The negative growth in non-food inflation in Q4 2024 was mainly due to deflation in housing & utilities and transportation prices, suppressing headline inflation to nearly 1 percent by year-end of 2024. Food inflation, however, which remained between 2 and 4 percent, is considered the main driver of the headline inflation, and its huge volatility in nature underscores the pivotal role of food prices in determining Bhutan's overall inflation trajectory. Bhutan's heavy reliance on food imports from India is exposed to exogenous price shocks, and is closely aligned with India's inflation, as evident by the recent decline of India's inflation to 3.2 percent in April 2025 from 3.3 percent in March

1. The lower prices for spices, vegetables, and pulses, alongside declining fuel costs and subdued housing inflation in India, have also corresponding impact on the price of items in Bhutan . 13

According to the RBI, India's annual inflation rate dropped to 3.62% in February 2025, down from a revised 4.26% in the previous month. 13 The inflation fell sharply for food (3.75% vs 5.97% in January), which accounts for nearly half of the Indian price basket, amid deflationary pressure for eggs, spices, vegetables, and pulses. Also, prices fell for fuel and light (-1.33%) and remained soft for housing (2.91%), although inflation was more elevated for miscellaneous goods (4.78%).

On the driver of food price volatility in 2024, the price of vegetables and fruits collectively contributed over 80 percent to food inflation. As of April 2025, vegetable prices rose by 2.7 percent and fruit prices by 1.2 percent. A supply-side shock, such as adverse weather in India, causes vegetable prices, notably tomatoes and onions, to surge by over 13 percent. However, the fall in the prices of milk, cheese, and eggs, with declines of 0.6 percent (y-o-y) in December 2024 and 0.1 percent in April 2025, respectively, offset the rise in price in vegetable prices, helping to moderate India's food price.

Chart 2.2.2Core&non-coreinflation

Jun-22 Jun-24 Jun-23Apr-22 Oct-23 Dec-24 Oct-22 Feb-23 Apr-23 Dec-23 Feb-24 Apr-24 Oct-24 Feb-25 Apr-25 Dec-22 Aug-22 Aug-23 Aug-24 Headline inflation Core inflation Non-Core inflation

According to the Bhutan Living Standards Survey (BLSS) 2022, Bhutanese households spend the highest portion of their food budgets on dairy products, vegetables, other cereals and pulses, and meats. On average, 15.3 percent of the food budget is spent on dairy products, 14.3 percent on vegetables, 11.1 percent on other cereals and pulses, and 10.4 percent on meats. These products are highly susceptible to price fluctuations and are often subject to inflationary uncertainty in Bhutanese households.

Chart 2.2.3Driversoffoodinflation

Jun-22 Jun-23 Jun-24 Oct-22 Oct-23 Oct-24 Feb-23 Feb-24 Feb-25 Dec-22 Dec-23 Dec-24Apr-22 Apr-23 Apr-24 Apr-25 Aug-22 Aug-23 Aug-24 Fish MeatBread and Cereals FruitsMilk, cheese and eggs Oils and fats Vegetables Sugar, jams, honeys etc Food products n.e.c Food Inflation Alcoholic BeveragesNon-Alcoholic Beverages

Since June 2023, non-food inflation has remained lower than food inflation. Within the non-food category, clothing & footwear and communication have been driving the price of non-food, recording 0.8 percent and 0.7 percent respectively.

Chart 2.2.4 Driversofnon-foodinflation

Jun-22 Jun-23 Jun-24 Oct-22 Oct-23 Oct-24 Feb-23 Feb-24 Feb-25 Dec-22 Dec-23 Dec-24Apr-22 Apr-23 Apr-24 Apr-25 Aug-22 Aug-23 Aug-24 Clothing Housing & Utilities Household Maintenance TransportHealth Communication Restaurants EducationRecreation Miscellaneous Non-Food Inflation

However, the disinflationary trends in the transport and housing sectors supported in moderation of overall non-food inflation in April 2025. Transport, which accounts for 9.9 percent in the overall Consumer Price Index (CPI) basket, recorded a negative growth of 1.4 percent in 2025 from 1.1 percent in 2024. The decline in transportation prices was largely due to falling fuel and electricity prices in India. Similarly, the housing & utilities, accounting for 12.5 percent of the CPI basket, also registered a disinflation of negative 1.6 percent in April 2025.

Chart 2.2.5 Driversofcoreinflation

8 6 4 2 0 -2

Jun-24Jun-22Jun-23Oct-22Oct-23 Oct-24Feb-23Feb-24 Feb-25Dec-22Dec-23 Dec-24Apr-22Apr-23Apr-24 Apr-25Aug-22Aug-23 Aug-24 Non-Alcoholic Beverages Alcoholic Beverages Clothing & Footwear Rents for HousingHousehold MaintenanceHealth CommunicationVehicle & MaintenancesTransport RecreationEducationRestaurants

Core inflation (excluding food and fuel items) fluctuated between 4 and 6 percent over the past three years, peaking at 6.4 percent in September 2023, before settling at 1.8 percent in April 2025, recording a 3-percentage-point decrease from April

1. This uptick was contributed by broad-based growth across goods and services. On the other hand, non-core inflation surged to 6 percent in April 2025 from 2.5 percent the previous year, primarily due to volatility in food prices. The core inflation, which stood at 1.8 percent in April 2025, was determined by prices of clothing, footwear, communication, household maintenance, and recreation, which collectively account for 25.1 percent of the core CPI basket. Key drivers included a 0.8 percent increase in communication prices, 0.3 percent in household maintenance, 1 percent in clothing & footwear, and 0.2 recreation. Non- Alcoholic Beverages and Vehicle & Maintenance contributed marginally, while the prices of Rents for Housing, Alcoholic Beverages, Health, and Transport fell. The Purchasing Power of Ngultrum (PPN), as measured by CPI, declined to Nu 54.2 in April 2025 from December 2012. Looking forward, inflationary pressures will be contingent on domestic and global factors, particularly the change in trade policy as a result of the hike in the US tariffs, making global trade volatile. The relaxation of vehicle and construction moratorium in July and August 2024 is expected to put strain on the external balances, exerting upward pressure on transport and housing prices.

3.Monetary&FinancialConditions

Moneysupplyanddomesticcreditgrewmodestly,fallingshortofprojections. However, systemic liquidity remains robust at Nu 29.4 billion surplus, and benchmark rates have softened amid declining funding costs. The interplay of the MLR framework and monetary policy implementation will critically influencesectoralresilienceaswemoveforward.

3.1 Monetary Policy Development

RMA continued to maintain an accommodative monetary policy stance by targeting a fixed exchange rate with the Indian Rupee (INR) as an intermediate target to achieve a low and stable price. To achieve these objectives, the RMA relies on reserve requirement and prudential regulations to manage liquidity in the banking sector, credit growth, and money supply in the economy. Given the favourable level of liquidity in the banking sector, credit has been growing in line with nominal GDP and stable inflation, the RMA maintain monetary policy stance at CRR 8 percent. Due to the nascent money and capital market in the country, the reserve requirement has inherently become less effective in transmitting the policy stance to fulfill the final objective of price stability and support economic growth. The absence of market-based monetary instruments, mainly the Open Market Operations (OMO) and standing facilities, limits the effectiveness of monetary operations and transmission, which aims to influence market interest rates and aggregate demand in the economy. The absence of secondary trading for government securities also precludes the development of the money and capital markets, which are essential for effective monetary policy and liquidity management. As a result, this hinders the RMA's ability to manage systemic liquidity, maintain exchange stability, and stabilize inflation in the economy. To address the long-standing challenges, the RMA has initiated modernizing the current monetary policy operational framework by developing the Interest Rate Corridor (IRC) framework. This initiative aims at achieving four key objectives, namely enhancing clarity on the RMA's operational target to align with policy rate of the RMA's monetary policy; introducing the market-driven policy instruments such as the OMO and standing facilities to conduct liquidity management; fostering money and capital markets to improve the monetary policy transmission and support deepening of the financial investment; and strengthening banks' treasury operations to reduce liquidity costs through participating in the competitive inter- bank borrowing and lending. By shifting from the administrative tool of reserve

requirements to market-based mechanisms, the RMA will be able to manage the liquidity conditions effectively to support monetary and financial stability. Towards this end, the RMA has completed developing the pre-requisite conditions for operationalization of the market-based monetary policy, which includes the IRC, liquidity analytical and forecasting framework, collateral framework, liquidity management operational framework, and governance framework. Under these frameworks, the RMA's policy rate will guide the movement of the short-term interest rate of the inter-bank market as an operating target of the monetary policy. The short-term interest rates in the money market, which is considered the first line of monetary policy transmission, will play a critical role in transmitting policy rate to the interest rate in the capital market. The change in interest rate of the bond and equity market will determine the final lending and deposit rate in the market, which influences the aggregate demand in the economy. To achieve this effective monetary policy transmission, it would require a sound macroeconomic policy assessment framework, strong functioning of the money market and institutional arrangement, effective policy coordination with banks and the Ministry of Finance, and robust communication strategies and data management system. Going forward, the RMA will focus on finalizing the Domestic Liquidity Management Framework and aims to implement liquidity management operations through OMO by March 2026. Additionally, the RMA will ensure full readiness to activate the Standing Facilities (SF) by the end of 2025. However, challenges persist as the eligible debt securities intended for use as collateral are not registered with the Central Security Depository (CSD). This lack of registration poses a significant obstacle to the smooth execution of liquidity operations.

3.2MonetaryAggregates

Money Supply (M2) grew by 1.7 percent, reaching Nu 220,405.5 million in FY 14 2023/24, against the initial projection of 14.8 percent. The slower growth in M2 was attributed to lower growth in current account deposits. The current account deposit held by the individual clients at banks declined by Nu 7,072.9 million from Nu 46,714.8 million in FY 2022/23. Additionally, currency in circulation also decreased by Nu 164.6 million from Nu 9,535.3 million in FY 2022/23, contributing to the overall moderation in money supply during the fiscal year. During FY 2023/24, total deposit liabilities grew by 1.9 percent, amounting to Nu 211,034.8 million, compared to a growth of 10.7 percent in the previous FY. While the deposit liabilities remained the main source of credit creation in the economy, the moderation in deposit growth is likely to impact the monetary base for money creation in the economy.

Money Supply /Broad money/M composed of Narrow money (M ), Time and Foreign currency deposits. Narrow money(M ) comprises of 14 2 1 1 currency outside banks & transferable deposits (saving and current deposits).

The transferable liabilities (current and saving deposits), which accounted for 52 percent of total deposits, declined from 11.3 percent in FY 2022/23 to negative 1.8 percent in the review period. This decline was largely attributed to a significant reduction in the growth of current account deposits, which fell sharply from 38.7 percent in the previous FY to negative 15.1 percent. The decline in current account deposit growth reflects lower business transactions which largely rely on the daily cash flows. On the other hand, other deposits, such as savings and time deposits, remained relatively stable, with minimal or insignificant change in growth during the review period. On the asset side, the growth of NFA for FY 2023/24 grew by negative 0.3 percent to Nu 79, 501.2 million from initial growth of negative 18.2 percent in FY 2022/23. The marginal improvement in NFA was supported by inflows from official grants and concessional borrowings, as well as inward remittances from Bhutanese Living Abroad (BLA), which helped offset pressures from import payments and thereby helped contribute positively to building the external reserves. As of December 2024, NFA grew by 29.2 percent, amounting to Nu 102,344.4 million, contributed by the inflow of official grants, concessional loans, and inward remittance. Additionally, domestic credit experienced a moderate growth of 0.1 percent from Nu 205,767.9 million in FY 2022/23, primarily on account of a sharp contraction in the claims on the government. The decrease in government claims resulted mainly from the early redemption of outstanding T-bills before the end of the FY. On the domestic credit front, the credit to the private sector grew by 5.1 percent from the initial projection of 22.6 percent for FY 2023/24. The delayed impact

Chart 3.2.1Privatesectorcreditgrowth

200,000 25 20.5 19.3 160.000 20 15.7 15.4 14.7 14.0 13.3120,000 15 10.8 80,000 10 6.5 6.4 5.1 Growth rate (%) 40,000 5

Jun-14 Jun-23 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-24 Credit Growth_RHS Credit Outstanding

from the lifting of the credit moratorium for commercial housing construction by selected banks in January 2024, as part of measures initially imposed to address the rising NPLs, contributed to the decline in growth of credit to the private sector.

The effects of this policy change were observed in the later quarter of 2024, as banks gradually eased the moratorium and resumed lending activities. Despite the lifting of the commercial housing construction moratorium, total outstanding credit across the banks saw only marginal growth, primarily due to prudent lending practices by the financial institutions, as credit exposures in some of the sectors have failed to meet the prudential requirements threshold, and rising concerns associated with a potential rise in NPLs. The above factors underpinned reasons for lower credit expansion, leading to a dampening of the overall credit investment trajectory. As of April 2025, domestic credit stood at Nu 247,177.1 million, up from Nu 215,958.6 million in April 2024. Key sectors such as housing, hotel & tourism, production & manufacturing, trade, and services accounted for a significant share of the total credit. Subsequently, the growth of M2 showed an improvement over the review period, increasing the growth to 11.8 percent in May 2025, compared to 5 percent in May

1. This improvement was largely driven by a significant increase in current account deposits, amounting to Nu 50,513.9 million, up from Nu 41,456.7 million in the same month of the previous year. On the counterpart side, the Net Foreign Assets (NFA) also strengthened, recording a growth of 22.7 percent, amounting to Nu 94,222.2 million from 76,787.2 million during the same period. These developments contributed to the overall improvement in money supply conditions. The excess liquidity position (excluding CRR) recorded moderate growth in FY 15 2023/24, unlike the situation during the COVID-19 pandemic. Surplus liquidity grew by 20.8 percent, amounting to Nu 17,278.7 million, primarily driven by higher foreign assets balance due to inflows under the ESP and redemption of Government T-bills. As of 31 March 2025, total liquidity in the banking sector stood at Nu 29,395.3 st million. This was largely contributed by inflows from the Government of India (GoI)'s fund for High Impact Community Development Projects (HICDP) and ESP, each

Chart 3.2.2LiquidityPosition(in%ofDepositLiabilities)

30 25 20 15 10 5

30-Jun-18 30-Jun-22 30-Jun-2330-Jun-17 30-Sep-18 30-Sep-22 30-Jun-20 30-Jun-21 31-Dec-18 30-Jun-24 30-Jun-19 30-Sep-2430-Sep-1731-Dec-17 30-Sep-19 30-Sep-20 30-Sep-21 30-Sep-23 31-Dec-19 31-Dec-20 31-Dec-2131-Mar-18 31-Dec-22 31-Dec-23 31-Dec-2431-Mar-17 31-Mar-19 31-Mar-21 31-Mar-22 31-Mar-23 31-Mar-24 31-Mar-20 31-Mar-25

contributing Nu 2,500 million through GoI support in the 13 FYP. Additionally, th the foreign currency accumulated through inward remittances, tourism, and export proceeds by banks to the RMA further increased banking liquidity.

The banking sector excess liquidity comprises of Current Account, Gift Settlement Account, and Payment & Settlement Accounts.15

In terms of liquidity distribution among banks, the Bank of Bhutan Limited (BoBL) held the largest share at 47.7 percent, followed by Druk PNB Bank Limited (DPNBL) at 25 percent, and Bhutan Development Bank Limited (BDBL) at 15 percent. Conversely, T-Bank Limited held the smallest share at 0.7 percent, with Digital Kidu and Bhutan National Bank Limited (BNBL) holding 3.8 percent and 7.8 percent, respectively. Currently, the surplus liquidity among the banks is distributed asymmetrically. The RMA is closely working with the Ministry of Finance in developing the Treasury Single Account (TSA), where the entire government's funds will be pooled and maintained with the RMA. This facility is expected to resolve the asymmetric liquidity distribution among the banks' interest rate developments. The MLR serves as the single benchmark for lending rates across all financial institutions, and indicates a forward-looking interest policy rate based on the marginal cost of funds. The marginal cost of funds reflects existing cost that banks incur in mobilizing one additional unit of deposit held by the customers. This framework ensures transparency and consistency in loan pricing by averaging the MLR of all banks. The MLR of individual banks is calculated taking three parameters, namely Marginal Cost of Funds (MCF), Negative Carry Charges on the CRR, and Operating Costs. Over the period, the MLR has proven to be an effective in softening of final lending rates, helping to narrow the spread between the Weighted Average Deposit Rate (WADR) and the Weighted Average Lending Rate (WALR), improving efficiency of computing banks' cost of funds and fostering greater competition

Chart 3.2.3ConstituentsofsingleMLR(%)

8 7.16 7.14 9.92 6.88 6.91 6.86 6.80 6.38 5.54 5.53 5.46 5.37 5.39 5.31 5.266 5.04

4 0.47 1.37 1.13 1.12 1.19 1.042 0.84 0.97 0.90 0.47 0.46 0.48 0.42 0.41 0.41 0.44 0.46 0 Dec-24 Dec-23 Jun-21 Dec-21 Jun-22 Jun-24 Jun-23 Dec-22 MC CRR Cost Operating Cost MLR

within the banking sector, due to a shift in deposit holdings from interest-bearing deposits toward lower or zero cost funds. As of December 2024, the single MLR, derived from the returns of five commercial banks, stands at 6.38 percent, a decline of 0.4 percentage points from June 2024. The MCF dropped to 5 percent, due to a shift in deposit holdings from interest-bearing deposits such as term deposits

toward lower or zero-cost funds such as demand deposits, particularly current deposits, which have no interest cost, thereby reducing the overall funding costs. The CRR cost also declined to 0.4 percent, a decrease of 0.03 percentage points from June 2024, mirroring the impact of the lower deposit liabilities. While operating costs of the banks decreased in line with improved operational efficiency of the commercial banks, particularly the adoption of banking technology innovation. Consequently, the WALR has been reduced to 9.1 percent, with the WADR remaining unchanged, and the overall market interest rate spread recorded at 3.9 percentage points. In addition to lowering the MLR rate, the RMA has supported facilitating credit flow to productive sectors and small and medium enterprises through targeted policy and prudential measures. With Nu 5,300 million assigned for the economic revival support fund under the ESP, the RMA and the government are responsible for developing the financing modalities and conducting post-impact assessment. From a total ESP package of Nu 5,300 million, the Concessional Credit Line (CCL) is currently being managed by the BDBL (Nu 3,300 million), and Nu 2,000 million is allocated to other FIs, excluding NPPF under the Reinvigoration Fund (RGF).

1. External Sector The persistent external sector imbalance has intensified due to larger trade deficit,reducedcapitalinflows,andheavierdebtburdens,alongsidecurrency depreciation.Offsettingthesepressures,remittanceinflowshavestrengthened, andforeigncurrencyreservesasofMay2025provide16.3monthsofessential import coverage. 4.1BalanceofPayments

Bhutan's external sector imbalances continue to remain elevated, as the CAD widened from an initial projection of Nu 51,978.5 million to Nu 55,32.2 million in the FY2023/24. Correspondingly, the CAD as a percentage of GDP widened from the initial projection of 19.6 percent to 21.4 percent in FY 2023/24, contributed by a higher trade deficit, notwithstanding the increase in service exports, particularly from travel and transportation, in line with a recovery in tourism. The external imbalance further deteriorated due to decline in capital account inflows, which fell from an initial projection of Nu 8,179.2 million to Nu 6,369.5 million in FY 2023/24, reflecting a decline in external grants. On the other hand, the financial account position recorded an increase to Nu 32,697.4 million from the initial projection of Nu 24,927 in the FY 2023/24. This is largely attributed to higher external debt disbursement from bilateral as well as multilateral agencies. The combined effect of a widening CAD, declining capital inflows, and increased external debt service signals growing external sector vulnerability. Rising external imbalance exerts mounting pressure on the external reserves, with the foreign currency reserves standing at USD 886.9 million as of March 2025.

Chart 4.1.1Balanceofpayments

Provisional Projection FY 2025/26 FY 2026/27 FY 2024/25 25,341.7 24,04140,000 11,8085,965 0 -40,000

-80,000 -32,697.4 -53,047 -40,936.6 -40,796.2 -51,591.1 -49,373.6 -55,321.2 -74,286.8 Financial Account Current Account Capital Account

The external sector medium-term outlook presents a mixed trajectory. While the CAD is expected to narrow in the near term, it is projected to widen over the medium term, primarily driven by an escalating trade deficit, as import demand continues to outpace export growth, despite strong performance in hydropower exports. Capital account inflows are anticipated to rise, supported by increased external grants. However, financial account pressures will persist, with net outflows expected to moderate but remain substantial. To ensure long-term external stability, the need to address structural vulnerabilities, including the persistent trade imbalance and low reserve buffers, while focusing on export diversification, prudent debt management, and sustained economic reforms, remains pertinent.

4.2ExchangeRate&RemittanceFlows

In a small open economy like Bhutan, the dynamics of exchange rate development, remittance flows, and foreign exchange reserves play a pivotal role in sustaining macroeconomic stability. Bhutan's exchange rate regime holds a longstanding peg of the Bhutanese Ngultrum (Nu) to the INR at par, reflecting the country's deep economic and financial integration with India. Both the Nu and the INR are accepted as legal tender in Bhutan, and the free convertibility between the two currencies further enhances confidence in the Bhutanese monetary system. Given the INR's managed floating exchange rate against major international currencies like the USD, Bhutan's nominal exchange rate against the USD closely follows INR-USD trends.

Chart 4.2.1 Exchange Rate Fluctuation

6.00 5.00 4.00 3.00 2.00 1.00In% -1.00 -2.00 -3.00 Jun-21 Sep-23 Mar-22 Mar-20 Mar-21 Jun-25 Jun-24 Mar-24 Mar-19 Jun-19 Sep-21 Jun-20 Sep-22 Mar-23 Sep-20 Dec-20 Jun-22 Sep-24 Mar-25 Jun-23 Dec-24 Sep-19 Dec-19 Dec-21 Dec-22 Dec-23

Nu/USD

From March 2019 to June 2025, the Nu depreciated gradually from Nu 70.4 to Nu 85.5 per USD. A sharp depreciation was observed in June 2020, reaching Nu 75.9 per USD, largely due to global financial disruptions triggered by the COVID-19 pandemic. Following March 2022, the Nu continued to weaken in line with broader INR depreciation, reflecting inflationary pressures, trade imbalances, and global market volatility, and surpassing the mark of Nu 80 per USD by March 2023.

Remittances have become an important source of foreign currency reserves and household income for Bhutan in recent years. The RMA has taken proactive steps to facilitate formal remittance flows. Initiatives such as the Remit Bhutan and a few banks' strategic partnerships with Australian-based institutions have made it easier and safer for Bhutanese residing overseas to remit money home. These reforms have also helped reduce reliance on informal channels, thereby improving transparency and data accuracy in tracking remittance movements.

Chart 4.2.2Remittanceflows

70 60 50 40 30 20 10 USD in million0 Jun-22 Jun-24 Jun-21 Sep-21 Jun-23 Sep-23 Sep-24 Dec-21 Sep-22 Dec-22 Dec-24 Dec-23 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25

Outward Remittance Inward Remittance (BLA)

There are approximately 71 countries where Bhutanese reside and remit foreign currencies to Bhutan. During the first quarter of 2025, BLA remitted USD 55.3 million, with the largest share from Australia (USD 35.7 million), followed by the United States, Kuwait, the United Kingdom, Canada, and other countries. Inward remittances have been on an upward trend over time, with significant surges in December 2023 and September 2024, reaching a peak of nearly USD 60 million. Similarly, the outward remittances have also increased, owing to the payments by Bhutanese businesses and individuals for the import of services, education expenses, and remittances by Indian workers based in Bhutan. As of March 2025, outward remittances amounted to USD 10.7 million, with more than 90 percent transferred to India, mainly attributed to the substantial number of Indian workers employed in Bhutan's housing and construction sector.

As of April 2025, external reserves stood at USD 816.8 million, sufficient to cover 16.3 months of essential imports, well above the constitutional minimum requirement

Chart 4.2.3Foreignexchangereserves

1,600 30 1,400 25 1,200 201,000 800 15 600 months 10 400USD in million 5200 0 0

Jun-19 Jun-20 Jun-22 Jun-23 Jun-24 Jun-21 Sep-19 Sep-21 Sep-22 Sep-23 Sep-20 Sep-24 Dec-21 Mar-23 Mar-25 Dec-19 Mar-20 Dec-20 Dec-24 Mar-24 Mar-21 Mar-22 Dec-22 Dec-23Mar-19 CC Reserves Rupee Reserves Months of Essential Import_RHS

of 12 months. Of the total reserves amounting to USD 816.8 million, USD 694.8 million is held in Convertible Currencies (CC), while USD 122.0 million (equivalent to INR 10,397.0 million) is in INR. Reserves saw a substantial increase during 2019 and 2020, reaching USD 1,509.7 million in the first quarter of 2021, due to reduced imports during COVID-19, higher grant inflows, and lower consumption-related outflows. However, there has been a gradual decrease in reserves since the second quarter of 2021 owing to investments by the government and the lingering impact of COVID-19 on the tourism industry.

1. Chronology of key monetary policy

First CRR set at a rate CRR was revised for the of 3% first time to 15%

January AprilDecember 19941984199619831993

RMA Commenced Central First uniform-price auction of The Government issued the Banking Operations RMA bills (Nu. 600 million) first one-year bonds valued worth for 31 days at a discount Nu. 100 million rate of 11%

Interest rate liberalization, where FIs Auctions were discontinued and were free to determine their Deposit & Tap Sales were introduced for Lending rates, while keeping interest RMA's bills spread at a maximum of 6%

October April March October September 1997 1999 2002 20011996

Removed the requirement Introduced Policy Rate along with First Reserve Repurchase issued of fixed spread on the the RMA Short -Term Liquidity to BoB for an amount of Nu. interest rate Adjustment Window (RSTLAW) to 500 million at a coupon rate of support liquidity deficient b anks 5% p.a

Introduced theBase Rate Introduced the Minimum System Lending Rate (MLR) system

JuneSeptember JuneAugustMarch 20192012200220162013

Monetary Operations Committee Fomulated market based new Mon- The RMA entered in a Rupee- (MOC) was established by the etary Policy Operation Framework Currency SWAP agreement RMA's Board of Directors during with the RBI for a total of  5.4 Its 32nd meeting billion at 5.5% p.a for 6 months

interventionsandmeasuressince1983

1. Deferment of Loan Repayments.
   1% interest rebate during deferment period for regular payments.

2. Non-Capitalization of interest
   Released the Capital Conservation accrued during deferment period. Buffer of 2.5% 3. Revision of cash reserve from 7 percent to 8 percent.

September November June 2022 July 2021March-April

October 2022202020202020 onwards

1. Resolution of Past Non-Performing Reduced the Cash Reserve Implemented the Domestic Loans Requirement from 10% to 7% Liquidity Management 2. Targeted Support Measures for System Existing Loans

Moratorium on new housing & hotel construction loans The moratorium The 10% incentive was on the import of vehicles extended discontinued for another six months

FebruaryJune-AugustJuneFebruaryOctober 20242023202320242023

Incentive was increased from 2 Permitting Foreign Currency Launch of Bhutanese Living percent to 10 percent to boost Account opening by all Bhutanese Abroad (BLA) Investment remittance inflow. Temporarily residing in Bhutan. Initiative 09 October 2023 discontinued the sweeping ac- The Single Minimum Lending Rate count arrangement to address the (MLR) based on December 2023 is immediate liquidity shortage. computed at 6.91 percent as of June 2023 Roll-out of the 10 percent incentive on Inward Remittance Scheme for the entire month of February 2024.

POSTAL ADDRESS Royal Monetary Authority of Bhutan Chhophel Lam, Kawajangsa Thimphu, Bhutan Post Box No. 154