Thursday, October 30, 2014

Is the economy slowing down or overheating?

The Bhutanese economy is experiencing an interesting paradox. Is the economy slowing down or is it overheating? I believe an economy can either slow down or overheat but not both. While it may seem unnatural, our economy shows both signs of slowing down and overheating.

Huge investments are being pumped into the hydropower sector, over Ngultrum 200 billion, which is twice the size of the country’s GDP. (Punatshangchu I alone is worth Nu 94B). Investment is integral to economic growth as it leads to more economic activity and hence higher growth rate. The huge investment is consequently leading to an increase in the supply of money and conventional economic laws dictate that an increase in the supply of money will push Inflation.

Inflation has been averaging 8 to ten percent which indicates a highly overheated economy.
On the other hand, however, despite a significant rise in investment level, growth rate has been recorded only at 4.6 percent, a decrease from an average 8 to ten percent from the previous years.

The economy recorded a slump but investment is increasing and inflation has been rising. So has the economy slowed down, or has it been overheating?

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