The Plan document identifies and necessitates doing some major revamps on investment climate
Bhutan’s economic environment benefits from foundational requirements such as peace, stability, and good governance. However, the immediate investment climate is marked by high administrative costs, lack of clarity regarding economic direction, and policy uncertainty. Bhutan ranked 89th out of 190 countries in the World Bank’s 2020 “Doing Business” report, highlighting the urgent need to improve the regulatory landscape by streamlining bureaucratic procedures. This would enhance the efficiency and effectiveness of investments and business operations.
Low productivity:
The overall productivity of Bhutan’s economy is notably low, with significant disparities across sectors. In 2022, the agriculture sector employed the majority of the labor force (43.5%), yet contributed the smallest share to GDP (14.67%).
Conversely, the industry sector employed the fewest (13.7%) but contributed significantly to GDP (31.82%). The service sector, comprising 53.5% of GDP and employing 42.8% of the labor force, faces a notable skills gap, with 52% lacking necessary skills.
Capital productivity is concentrated in building and construction activities, largely driven by public sector investments in infrastructure such as hydropower generation and health and education services.
High transportation costs, owing to Bhutan’s challenging mountainous terrain and landlocked status, exacerbate infrastructure expenses. Moreover, investment in productive assets like machinery and equipment remains low and is still in a developmental stage.
Entrepreneurial and institutional capabilities are crucial facets of productivity. However, Bhutan’s business and public service ecosystem is characterized by high administrative and opportunity costs, marked by cumbersome procedures for licensing and numerous permissions and authorizations.
Policy uncertainty further complicates matters, hindering swift regulatory reforms necessary to adapt to changing circumstances and spur economic growth.
Limited market access:
Bhutan’s integration into the regional and international economy has been limited due to the inability to engage in increased trade. Import and export costs are very high, with its logistic performance index being the second lowest among South Asian countries in 2022.
The majority of Bhutan’s trade is with India, and access to international markets is limited to some 27 potential destinations which require efficient trade routes and logistics connections to make them potentially favourable destinations for Bhutanese exports. Exports are constrained by infrastructure limitations including a lack of market information, port and airport facilities, telecommunications and inland transport.
Moreover, there are internal barriers such as an unreliable supply of electricity and other utilities, and slow progress in the simplification of customs and administrative procedures among other reforms to ease doing business. External barriers include non-tariff barriers such as technical and phytosanitary measures. Strict environmental standards also pose constraints.
Weak private sector:
In the last six decades of planned development, the private sector has gradually taken on a larger role in the economy.
However, business market shares of the national productive private sector have remained insignificant due to high production costs stemming from poor infrastructure, old technology and insufficiently skilled labour.
The Bhutanese private sector remains weak and there is still room for expansion and growth.
Cottage and small-scale businesses dominate the sector, respectively making up over 30 percent and close to 65 percent of the total active industrial licenses in Bhutan as of June 2023. They mainly operate in retail and trade, construction and transportation services, tourism, and light industry.
Most businesses are sole proprietors (96 percent) and very few are incorporated companies (three percent). Bhutan has only a handful of large industrial groups typically active in retail, domestic trade and construction.
Trade expansion is hindered by a range of products that is not competitive and limited, gaps in trade facilitation, high technology costs, and a small market that does not provide for scale to build competencies and expand externally.
The sector suffers from suboptimal capacity, knowledge and organisation, and productivity is impacted by inappropriate skills. These, in turn, are linked to a lack of quality and relevance of the education system, low investment in training, lack of training incentives and programmes, as well as poor work ethics.
The result is that economic diversification is still limited, and private sector contribution to growth and job creation is minimal.
The government through State-Owned Enterprises (SOEs) continues to be a significant economic agent. SOEs by virtue of their size, and government backing and ownership, are well-suited to venture into areas that require large investments, long gestation periods and high risks.
SOEs also fulfill a social mandate to deliver goods and services that may not necessarily be profitable, such as to ensure food security, and will thus continue to play a critical role in Bhutan’s economic development. However, some investments by SOEs are in commercial spaces like manufacturing, real estate and trading, where the private sector already has a presence.
Several SOEs, including the Bhutan Livestock Development Corporation Limited, Food Corporation of Bhutan Limited and Farm Machinery Corporation Limited face profitability and performance issues. Overall, challenges remain in investment management, corporate governance, and financial reporting quality.
Weak financial ecosystem:
A sound financial system is a critical component of the economy.
While substantial capital expenditure is expected to be sourced through external grants, sizeable capital will still have to be mobilised from domestic financial institutions and capital markets to realise the goal of a USD 5billion economy by the end of the 13th FYP.
However, both the banking sector and capital market are still at a nascent stage and critical players in the financial ecosystem are currently non-existent.
The Financial Services Act 2011 restricts direct engagement of foreign investors in portfolio investments. The growth of a skilled financial workforce has been limited.
Moreover, access to finance has traditionally been limited to large corporations that have the required collateral. The cost of borrowing is very high, with Bhutan having the highest net interest margin in the region.
In 2024, Bhutan’s capital market consisted of 18 listed companies, totalling BTN 66,000 million in market capitalisation, equivalent to 29 percent of the GDP. This is in stark contrast to most developed nations that have very high ratios with Switzerland’s capital market at 270 percent of the GDP, the United States at 197 percent and the United Kingdom at 104 percent, while rapidly emerging markets are also reaching high ratio levels with South Korea at 127 percent and India at 99 percent.
Limited access to finance is one of the key reasons hindering private sector growth, given that the sector’s composition is dominated by small businesses which face collateral issues in obtaining bank lending.
This inability to expand and the lack of entrepreneurial activities due to inadequate financing is illustrated by the fact that in 2022, only 2.7 percent of firms were new and over 95 percent of the firms employed fewer than five people.
Meanwhile, according to the 13th Five Year Plan (FYP) document, a long-term priority remains ensuring a healthy, educated, and skilled workforce capable of higher productivity.
However, this objective faces constraints due to challenges in the quality and relevance of education and skills development, exacerbated by Bhutan’s small population size. These issues must be effectively addressed alongside other critical priorities outlined for the 13th FYP.
By Tashi Namgyal, Thimphu
