Expert says challenges from SoEs impede Bhutan’s private sector growth

The importance of the private sector for economic growth has long been acknowledged by Bhutan. However, Bhutan’s private sector has not been able to rise as expected, due to several factors. One of the factors is competition by state owned enterprises (SoEs), with Bhutan home to about 34 SoEs which are grouped as commercially oriented SoEs and socially oriented SoEs.

According to Sonam Lhendup, Economic Specialist at the Asian Development Bank’s (ADB) Bhutan Resident Mission, the largest contributor to GDP in Bhutan is actually public sector-dominated, which indicates that the private sector has failed to grow. He also said, that SoEs take up space and crowd out the private sector in many areas where the private sector could actually make a positive impact. Unlike the private sector, SoEs have the potential to grow and perform activities, due to factors such as subsidies from the government. SOEs don’t face issues the private sectors face. 

“Some examples of SoEs that directly or indirectly compete with the private sector and crowd them out include Food Corporations of Bhutan Limited (FCBL), which competes in wholesale and retail trade. Another is the National Housing Development Corporation Limited (NHDCL), which competes in real estate activities, an area in which the private sector is also involved,” he said.

“This is where the government dominates GDP contribution. One of the reasons that lead to stagnation in the private sector growth is competition from state-owned enterprises (SOEs),” he reiterated. 

Apart from this, there are SoEs, who have taken up even minor business, which the private sector can handle. Tandin, a Thimphu resident said that SoEs are also selling commodities like washing machines, gas stoves and others, which the private sector can easily do. “The other question we need to ask is if the SoEs functioning through support from the government can sustain in the long run or not,” he said, adding that while social services are important, it should be based on the potential and financial ability of the government. “Ultimately, the government loses,” he said. According to the SoE report of 2020, SoEs incurred loses (see table).

Meanwhile, socially oriented SoEs are under the Ministry of Finance, while commercially oriented SOEs are under Druk Holding Investment (DHI). It is mostly the competition from SOEs under DHI that poses a challenge. 

According to the Asian Development outlook April 2023. Bhutan is facing a significant policy challenge in strengthening the private sector as a partner in economic development. While the country has envisioned the private sector as an engine of growth, private sector development has stalled, except for hydropower. The report also states that the lack of a dynamic private sector has led to rising youth unemployment, with the rate reaching 29% in 2022.

According to the report, the public sector and agriculture provide about 63% of employment and a quarter of GDP, while construction, electricity, water, and gas provide another quarter of GDP but only employ 8% of the workforce. Meanwhile, the GDP share of the manufacturing industry has slowly fallen since 2009, indicating a lack of productivity growth.

This was also shared by Sonam Dendup. “The share of the industrial sector in GDP is actually decreasing, despite the fact that the hydropower industry is included in this sector. Meanwhile, the contribution of the agriculture sector to GDP has remained constant. On the other hand, the service sector’s contribution to GDP has increased over the years,” he said, adding that, the growth of the service sector, or its contribution to GDP, is coming primarily from public administration, defense, education, health, and social work activities.

Additionally, the report mentions that the private sector is constrained by a regulatory burden and factor market constraints, including burdensome business compliance processes, a shortage of skilled workers, low digitization, crowding out by state-owned enterprises, and poor access to finance. In response, the government is undertaking reforms to improve the business and investment climate.

“The reforms include simplifying and digitizing administrative approval processes, integrating public services, and improving coordination between public agencies.”

However, additional reforms are necessary for the private sector to achieve the government’s ambitious target of a USD $10 billion economy by 2034. The reforms required include creating an environment of policy certainty, promoting the private sector through public-private partnerships, privatizing loss-making state-owned enterprises, and supporting skill development, product innovation, and process innovation.

Foreign direct investment (FDI) will also be essential, given the large and growing gap between savings and investment. The urgency of private sector development is greater than ever given the ongoing mass emigration.

Thousands of Bhutanese have emigrated for economic reasons in the past year. Unless the private sector is empowered to create jobs that match the aspirations of Bhutanese youth, the exodus of human capital will continue, hampering the country’s long-term development efforts, the report states.

Tshering Pelden from Thimphu