FDI flows see steady decline in three years

A total of six FDI projects worth Nu 713mn have been approved in 2021

The country recorded a steady decline in the number of Foreign Direct Investment (FDI) projects coming in with only six projects worth Nu 713mn having been approved in 2021.

According to the Ministry of Economic Affairs (MoEA), FDI inflow in terms of number increased to 16 projects in 2018, and gradually decreased to 12 projects 2019, and in 2020 with 10 projects. The number of projects approved and the project size have both declined during the year 2021.

Economic Affairs Minister Loknath Sharma said that FDI flows are expected to fall in 2021 because FDI flows to developing countries have also dropped.

“This is because sectors that have been severely impacted by the pandemic, including the primary and manufacturing sectors, account for a larger share of their FDI than in developed economies,” he said.

Lyonpo said that the trend in the country is similar to the global trend which reported that both the number of FDI projects and capital investment in FDI dropped by a third in 2020 (FDI Intelligence, 2021). 

“The Covid-19 has disrupted FDI considerably worldwide. Global FDI flows collapsed in 2020 and fell by 42% (UNCTAD, 2021). Similarly, FDI flows within the country have declined to a great degree,” Lyonpo said.

However, a total of six FDI projects worth Nu 713mn have been approved and another six projects worth Nu 1.1bn were also approved “in-principle” in 2021.

The Department of Industry approved a total of six FDI projects, three projects are in the manufacturing sector and the other three are in the service sector. The total number of projects stands at 96 with six new projects approved during the year 2021. Two FDI projects were converted to domestic projects during the year.

About 64% of the FDI projects in the country are received from investors based in Asia. From within Asia, India remains the major source of investment in Bhutan with 50% share, followed by Singapore with 18% and Thailand with 11%.

In addition, a total of nine FDI projects were issued FDI Registration Certificate in 2021 – three projects are in the manufacturing sector and the remaining six in the service sector. The projects are in various stages of approval.

According to the Ministry of Economic Affairs (MoEA), the hotel sector remains the sector with the highest number of FDI received till date with 38%, followed by IT and ITES with 22%. The share of the hotel sector to overall FDI declined from 42% in 2019 to 39% in 2020 and to 38% in 2021.

However, the share of IT/ITES increased from 19% in 2019 to 21% in 2020 and 22% in 2021. The power intensive manufacturing sector also increased from 5% in 2019 to 8% in 2021.

According to the MoEA, the service sector dominates the overall FDI with 78%. Of which 68% of the approved projects have started commercial operation. About 84% of the approved FDI projects fall in the priority sector of the government as stated in the FDI Policy.

The value of FDI projects as per the project report stands at Nu 43.3bn as of 2021.

FDI projects are mostly located in Thimphu, Paro and Chhukha, with 49% of the operating FDI projects concentrated in Thimphu alone.

According to the MoEA, an assessment of the scenario of FDI is carried out through survey of the FDI projects and validation of the information through Audited Accounts submitted to the government agencies. While attempts were made to cover the entire FDI projects, information from a few companies could not be collected due to temporary closure of businesses.

Meanwhile, the country has received capital inflows worth Nu 423mn in 2020. An inflow in convertible currency was recorded at US$ 3.54mn and that in Indian Rupee at INR 175.38mn. For the number of huge projects approved in 2020, the inflows is much higher than what has been received.

As most projects could not be initiated due to the Covid-19, the actual inflows are comparatively lower. The inflow in convertible currency received during the year has declined by over 80% from that of capital inflow received in 2019.

Similarly, the inflow received from the Indian investors declined by 77% as compared to the inflow received in 2019.

According to the MoEA, a total of 4,747 Bhutanese were directly employed by 57 operating FDI projects as of December, 2020.

FDI Scenario in 2020

According to the MoEA, most economic sectors in the country were hit by the pandemic and workers were laid off as Covid-19 continued to distort the economy.

However, except for the hospitality sector, all FDI companies have retained their employees on the payroll.

The annual survey of the ministry revealed that with the exception of those working in hotels, most of the employees of the FDI companies have not availed monthly income support under the Druk Gyalpo’s Relief Kidu (DGRK) as of December 31, 2020.

“The employee status of 57 operating FDI projects reveals that 73% of the total employees are retained on their regular salary and 2.6% on partial salary from the company and partial support from relief kidu,” states the survey report.

About 22% of the total employees are fully dependent on the kidu (DGRK). These employees are all employed in the hotel industry, which has been severely impacted by the pandemic.

In addition, the manufacturing sector on an average employed 70 Bhutanese, while the service sector employed 89 on average. Of the 57 operating companies, 65% have indicated a decline in their business income during the year 2020.

“About 3.5% of the operating companies reported an increase in their business income during the year,” states the report, adding that the hotel industry and dairy, agro, water bottling and beverage industry reported an income decline of 75% to 100% during the year.

Meanwhile, tax contributions by the operating FDI companies are recorded at Nu 796mn for the income year 2020. The contribution has declined by almost 48% from the contribution recorded for the income year 2019, which was Nu 1.5bn.

According to the Prime Minister’s State of the Nation report, to generate at least Nu 15bn annually to offset loss of the tourism revenue, the government has approved a total of 40 (32 medium and eight large-scale) new domestic industrial projects in 2021 worth approximately Nu 18.7 bn. 

The government also approved 4,313 new CSIs in 2021, thus to create employment opportunities, value addition to local resources, and reduce imports.

Kinley Yonten from Thimphu