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The size of an economy and quality of infrastructure is crucial to improve the investment climate in the country. Bhutan has the advantage of neither.

Structural change in the economy upsets investment climate

The size of an economy and quality of infrastructure is crucial to improve the investment climate in the country. Bhutan has the advantage of neither.

World Bank’s country director, Qimiao Fan highlighted this during the launch of Bhutan’s investment climate assessment yesterday. However, he said Bhutan is far ahead in terms of the most important aspect of improving the investment climate – political commitment to bring about policy reforms.

“Bhutan being a mountainous country, quality infrastructure is big challenge. You should focus on the softer side, on the regulations and policies,” he said.

He said that it is a quick gain for the country because building infrastructure takes a lot of financing but it takes very little to change policies.

While lauding Bhutan’s economic growth, he pointed out the structural challenges the economy is facing. For instance, state enterprises and public sector are drivers of economic growth. Private sector is relatively small with about 28,000 registered firms, 350 limited liability companies, and a few partnership and joint ventures.

While hydropower is expected to bring in huge chunk of revenue, he said it does not create jobs. While private sector is potentially the job creator, 56 percent of the work force is in the agriculture sector.

The assessment of the investment climate, themed ‘removing constrained to private sector development to enable the creation of more and better job’ highlighted that the country has experienced major structural transformation in the last 15 years.

In 2002, agriculture sector’s GDP share was 44 percent. In the span of 15 years, it decreased to 17 percent. An opposite trend was witnessed in the manufacturing and industry sector.

It was also stated that about 40 percent of the micro, small, medium and large enterprises point to access to finance as one of the challenges for private sector development.

However, the World Bank stated that while interest rates are high, there is limited product development from the firms. Lack of financial literacy was also cited as of the factors contributing to lack of access to finance.

Access to skilled labour was one of the challenges as it is not easy to employ foreign skills. Significant difference in pay scale between the private employees and those in public and civil service makes private sector unattractive for the jobseekers.

“As the median wage fell substantially from 2002 to 2015, the productivity also fell,” Massimiliano Santini from World Bank, the co-author of the report, said. He added that the low productivity in the manufacturing sector show high cost of trading in Bhutan.

Without a viable transportation network and limited FDI entry, the report highlighted that access to domestic and international market was an issue. However, it stated that this could be improved with reforms on the policy side and change in regulations.

Economic Affairs Minister Lekey Dorji, said that because of the structural challenge investment in enhancing productive capacity is not translating into productive employment.

“The country’s economy will be strong and resilient only if private sector is robust and resilient,” minister said.

Over the last five and half decades, Bhutan, he said has made tremendous socioeconomic progress, slashing the poverty by half and doubling the per capita income. “But we are still taking about private sector development,” he said, adding that this is due to the structural challenge in the economy.

The government, he informed, has embarked on a series of cross cutting reforms, most pertinent being the economic development policy. “It is time for us to put our money where the mouth is. We are committed to take investment climate to the next level.”

Among others, one of the recommendations for the country was to rely on external markets to sustain gains in productive private employment growth.

The assessment report highlighted that expansion of markets in tradable services and the rise of consumer consciousness in high value market provide opportunities for Bhutan to diversify its economy, leveraging on Bhutan’s unique institutional assets like low corruption, political stability, cheap power and English-speaking workforce among others.

One suggestion was to expand BDBL’s scope to provide export financing for agriculture and group lending to cooperatives. Encouraging growth of micro-financing institutes, targeted financial literacy programme and improving priority-lending scheme were also few recommendations.

Rewarding private sector experience for public sector recruitment was identified as one of the ways to create more jobs in private sector.

The World Banks has also given specific recommendation to tourism, ICT, and agribusiness sectors.

In tourism, introducing fee for regional tourist and building capacity of three-star hotels and restaurants was recommended. With regard to ICT, upgrading internet infrastructure was suggested.

As for the agribusiness, World Bank’s recommendation was to develop regulations, oversight roles and communication strategy for brand Bhutan. Promoting storage and logistics investment, the report stated would facilitate high value products.

Tshering Dorji

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