Although hydropower has served Bhutan’s development well, the World Bank’s systematic country diagnostic recommends Bhutan to explore alternative sources of growth.
Evolution of the electricity export market in South Asia has been rapid, which means hydropower’s contribution to the country’s GDP growth will demand drastic increase in power supply in the coming decades to enable investments in physical and human capital.
Together with the country’s political preferences to reduce carbon growth, this could create opportunities for Bhutan’s hydropower as a reliable renewable power source, says the report. India alone could need more than 300,000 MW of additional renewable energy capacity in the next few decades.
Hydropower has driven Bhutan’s development success by contributing to GDP growth and enabling investments in physical and human capital. High economic growth in the region will require a steep increase in power supply in the coming decades.
For Bhutan, however, there are risks. Future is becoming ever less certain due to climate change. Considering innovations such as the growth of battery storage technologies in the coming years, the future development of hydropower could become irrelevant due to higher costs, environmental and social factors.
“There is a need to diversify financing sources and export markets for hydropower. To date, almost all of Bhutan’s hydropower projects have been financed by India, which takes all its hydroelectricity exports. However, it has become more difficult to raise financing from India for new hydropower projects,” says the report.
The challenge for Bhutan is that Bhutanese companies find it hard to participate in joint venture projects. The government’s high-level committee that reviewed Bhutan’s future hydropower development plans is yet to make the findings public. What this means is that Bhutan’s development model, built around hydropower, could witness a significant change.
The need to realign Bhutan’s growth model so is becoming more urgent.
“Under the status quo scenario, Bhutan’s growth is projected to decelerate abruptly after 2021 and fall below 3 percent in less than a decade,” warns the report. Building the country’s skill sets and the systems to adapt to changing conditions is an imperative that cannot be ignored.
The report says: “Bhutan is fortunate that it will be able to use hydropower revenues during this transition process; realignment could involve short-term costs in terms of lower growth and higher unemployment, but the cushion provided by the hydropower revenues will help ease the transition process.”
What could happen otherwise?
Bhutan could miss the demographic window of opportunity.
The report recommends some modifications in the sector because the hydropower sector will continue to play a dominant role in the country’s economy. Investing in small, medium-sized as and mega hydropower projects could help reduce the risk of depending too heavily on a few mega-projects.
“Managing smaller projects could also help build the required capacity in the domestic market and establish vertical and horizontal links,” says the report. “Better management of environmental and social effects and improvements in the design and construction stage could help limit time and cost overruns, which have been frequent and rampant.”
Taking Bhutan’s development success to the next level will so require boosting private sector development, strengthening macro-fiscal stability, investing in human capital, and improving service delivery. Also, not least, it will demand enhancing disaster and climate resilience and addressing implementation gaps, among others, without which the country find it challenging to diversify its export markets.
The report points to the significant potential for ICT-enabled services that could support regional and global trade. “The proliferation of digital technologies globally creates opportunities for individuals and businesses in landlocked countries like Bhutan,” it says.
Investment in ICT-enabled services could provide Bhutan with opportunities to remove challenges related to transport connectivity. In other words, this could help the landlocked country exploit economies of scale. However, the reality today is Bhutan is ranked among the lowest in the ICT Development Index. The index takes into account access, use, and ICT-related skills.
Says the report: “Fast, reliable, and affordable Internet connectivity with the rest of the world is essential for these services to develop. Bhutan’s fibre optic network within the country already provides the infrastructure to promote business incubation and potential startups in the ICT sector.”
What should Bhutan do to realise its full ICT potential?
The country must improve both ICT infrastructure and policies and encourage e-commerce activities, greater digitisation of financial services, tourism, and other key sectors of the economy. But then that also require easy access to finance.
Diversification of economy will remain a monumental challenge otherwise.