If Bhutan is to achieve its ambitious target of a USD 10 billion economy by 2034, the private sector needs to grow. This will require additional reforms and it is imperative to create an environment of policy certainty, promote the private sector through public-private partnerships, privatize loss-making state-owned enterprises, and support skill development, product innovation, and process innovation. This has been outlined in one of the latest reports by the Asian Development Bank (ADB).
The Bank has underlined that the private sector is constrained by a regulatory burden and factor market constraints. “Bhutan’s business environment is held back by burdensome business compliance processes, a shortage of skilled workers, low digitization, crowding out by state-owned enterprises, and poor access to finance,” it says. The report also mentions that in an economic census in 2018, businesses cited customs procedures, business licensing, workforce skills, timely clearances, tax administration, and access to finance as factors affecting operations. Without a conducive business environment, private firms struggle to grow and exploit economies of scale.
Moreover, the report speaks about the need to establish an environment of trust and policy certainty needs to be established. It also says the urgency of private sector development is greater than ever given 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 says that private sector development in Bhutan has stalled despite it being envisioned as an engine of growth. Aside from hydropower, the economy is largely stagnant and this is an obstacle to equitable growth because hydropower and related sectors use little labor. While the public sector and agriculture collectively provide about 63% of employment and a quarter of GDP, construction, electricity, water, and gas provide another quarter of GDP with only 8% of employment
ADB has further said that the GDP share of manufacturing has slowly fallen since 2009 while its employment share held steady, indicating a lack of productivity growth. The absence of a dynamic private sector constrains the creation of productive employment for Bhutanese, which is reflected in rising youth unemployment over the past 3 years to a high rate of 29% in 2022.
Speaking about the government’s reform to improve the business and investment climate by simplifying administrative approval processes and digitizing through the Government to Citizen initiative, it says that public services are progressively being integrated and placed online. “Ongoing civil service reform has at its core, improved coordination between public agencies and easy access to public services. Foreign direct investment will be essential, given the large and growing gap between savings and investment. As competition for such inflows is highly competitive, a favorable policy framework is required to induce entry, smoothen the operations of foreign companies, and improve access to credit.”
Further, the report mentions that an environment of trust and policy certainty needs to be established. “The urgency of private sector development is greater than ever given 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.”
In terms of demand, the main driver of growth will be the overall expenditure on consumption. It is predicted to increase by 25.4% in 2023 and 12.3% in 2024, primarily due to robust private consumption. This trend aligns with past government election cycles, where strong private consumption has been a consistent factor. Meanwhile, public consumption is expected to grow by 5.6% in 2023 and 5.0% in 2024.
However, there are challenges on the investment front. Fixed investment is anticipated to contract by 8.1% in 2023 and 1.6% in 2024. This contraction is exacerbated by a significant reduction of nearly 20% in the capital allocation for FY2024, marking the most substantial decrease in the Twelfth Five-Year Plan (2018–2023). The transition to a new government and a new five-year plan is likely to slow down investment growth as the groundwork is laid for newly selected projects and their financing.
As a result of these dynamics, the budget deficit is expected to slightly widen in FY 2023 due to shrinking grants and other revenue sources, but it should narrow in FY2024 as expenditure decreases. The government remains concerned about the widening fiscal deficit and the diminishing foreign exchange reserves. If the reserves continue to decline at the rate observed in 2022, they could fall below the constitutionally mandated threshold, which requires them to cover 12 months of essential imports. This situation poses a significant challenge for Bhutan, given its small size and dependence on imports.
In the short term, Bhutan’s exports and financial situation are likely to be sustained by higher hydropower output. Additionally, the expected reduction in large information technology imports by mid-2023 should help stabilize the reserve position.
It is essential for Bhutan to adhere to its medium-term strategy for managing debt and follow the latest recommendations from the International Monetary Fund (IMF) as outlined in Article IV. These measures include gradually consolidating fiscal policies, mobilizing revenue, normalizing monetary policies introduced in response to the COVID-19 pandemic, and addressing potential risks to banks, particularly concerning nonperforming loans once pandemic relief measures expire.
Regarding inflation, headline inflation is expected to remain elevated at 5.5% in 2023, primarily driven by the relatively high global prices of petroleum, food, and other commodities due to the Russian invasion of Ukraine. However, Bhutan’s focus on food security is expected to keep domestic food prices low, offsetting some of the imported inflation. The moderation of inflation in India, projected to be at 5.0% in 2023 and 4.5% in 2024, is expected to help contain inflation in Bhutan, as a significant portion of the consumer price index is influenced by imports from India. Typically, a 1.0 percentage point change in India’s inflation results in a 0.5 point change in Bhutan’s inflation. With improvements in the global supply chain and geopolitical stability, along with the anticipated moderation of inflation in India, Bhutan’s average inflation for 2024 is forecasted to be 5.1%.
Ugyen Tenzin from Thimphu