Bhutan’s economy is projected to maintain strong growth over the medium term, driven primarily by hydropower development and sustained capital investment, although rising youth unemployment and higher oil prices linked to the Middle East conflict present growing challenges. Real GDP growth is forecast at 7.1 percent in FY25/26 and 6.4 percent in FY26/27, supported by the commissioning of the Punatsangchhu II hydropower project, ongoing construction of Dorjilung and Kholongchhu hydropower plants, and continued public investment under the 13th Five-Year Plan. On the demand side, hydropower exports, private investment, and public capital spending are expected to underpin growth, while services sector expansion may moderate. Inflationary pressures are projected to rise due to higher food and fuel prices, with elevated oil prices exerting additional pressure despite the introduction of a fuel price smoothing framework. External vulnerabilities remain significant, with large current account deficits driven by hydropower-related imports, although international reserves are expected to improve. Fiscal pressures are intensifying as lower tax revenues and higher capital expenditures widen the fiscal deficit and public debt rises, though debt distress risks remain assessed as moderate. Financial sector risks persist due to elevated non-performing loans, while poverty continues to decline amid uneven spatial progress. Overall, the outlook is subject to downside risks from external shocks, climate change, and delays in hydropower projects, alongside upside potential from structural reforms and private sector development.