Bhutan’s economy to grow 6.86% in 2026 amid slower hydropower boost

2026-03-02 - 08:35

Construction and industry to remain key drivers Bhutan’s economy is projected to grow by 6.86 percent in 2026, moderating from an estimated 8.71 percent in 2025, according to the latest domestic economic outlook. The slowdown is largely attributed to an expected deceleration in the industry sector, particularly as growth in the electricity subsector tapers off following the one-off boost from the commissioning of PHPA-II in 2025. The moderation in electricity growth is expected to be partially offset by strong performance in the construction sector, driven by hydropower-related works and increased capital spending. Despite the slowdown, the industry sector is projected to remain the primary driver of growth in 2026, contributing 3.98 percentage points to overall growth, followed by the service sector. The 2026 growth estimate represents a downward revision of 1.39 percentage points from the previous quarter’s projection. Economic growth for 2025 is estimated at 8.71 percent, revised downwards by 0.11 percentage points from the previous quarter estimate. This revision reflects a lower projected contribution from the service sector, as tourist arrivals were lower than earlier projections. However, this downward pressure was partly offset by stronger-than-expected electricity generation during the year. Looking ahead, GDP growth is projected at 7.40 percent in 2027, with the economy expected to grow above an average rate of 6 percent over the medium term. Growth is anticipated to continue to be driven primarily by the industry sector, supported by the implementation of major hydropower projects. A gradual recovery in tourism and related services is also expected to support overall economic performance. Nevertheless, the growth outlook remains highly sensitive to developments in the hydropower sector, with delays in project implementation identified as a downside risk to medium-term growth prospects. The agriculture sector is projected to grow by 1.94 percent in 2026, unchanged from the previous quarter’s estimate as high-frequency agriculture data stabilises. Livestock production is expected to grow by 2.41 percent in 2026, contributing 0.92 percentage points to overall agricultural growth. The forestry and logging subsector is projected to expand by 4.24 percent in 2026, contributing 0.77 percentage points, higher than the 0.70 percentage points projected for 2025. Forestry and logging are expected to sustain the growth recorded in 2024, supported by rising timber demand as the construction sector gains momentum. Industry sector growth is projected to slow to 12.20 percent in 2026 from 16.69 percent in 2025. This reflects a normalization in electricity subsector growth, which is expected to slow from 25.71 percent in 2025 to 2.19 percent in 2026 following the one-off capacity jump resulting from the commissioning of PHPA-II. Electricity generation increased by 36.20 percent in 2025, rising from 11,650.237 MU in 2024. PHPA-II accounted for more than 80 percent of this increase, alongside a smaller capacity addition from the commissioning of the first small hydropower project, Suchhu. The electricity subsector growth projection for 2026 is 0.16 percentage points lower than the previous quarter estimate, mainly due to the extension of the Dagachhu Power Plant shutdown period from six to twelve months. Over the medium term, the subsector’s contribution to industry growth is expected to remain moderate at around one percentage point, before increasing in 2029 with the anticipated commissioning of Khorlochhu and other small hydropower projects. The construction sector is projected to grow by 32.02 percent in 2026, accelerating from 13.26 percent in 2025. Growth is driven by anticipated construction activities related to major hydropower projects, including Khorlochhu, Dorjilung and PHPA-I, as well as increased government investment. This represents a downward revision from the previous quarter’s estimate of 41.50 percent, reflecting shifts in Khorlochhu project disbursements and constraints related to implementation and absorption capacity. In the medium term, construction sector growth is expected to be sustained through 2027 and 2028 due to continued hydropower-related works. However, this growth is also expected to result in higher imports of labour and construction materials, increasing vulnerability to external economic fluctuations and external sector risks. Manufacturing and mining and quarrying sectors are projected to grow by 5.56 percent and 3.35 percent, respectively, in 2026. The commencement of operations at the Norbugang Industrial Park is expected to partially support a recovery in manufacturing activity.