…govt. reviewing FDI policy to attract more FDIs
Having failed to attract foreign direct investments (FDIs) over the years, the FDI Policy is yet again on the government’s table for review.
According to the Asian Development Bank (ADB), the average FDI inflows to Bhutan have been less than USD 20 million a year since 2010, contributing less than 1 percent of the gross domestic product.
“Bhutan is the least country attracting the FDI in the Asian countries,” the ADB stated.
Since the opening of the FDI in the country with the adoption of the FDI Policy 2002 and its implementation in 2005, Bhutan registered 101 FDI projects worth Nu 43.62 billion (B) as of 2022.
The hotel sector has the highest number of FDI, contributing to 36 percent of the total projects which was a drop from 42 percent in 2019.
Information Technology (IT) or Information Technology-Enabled Services (ITES) comprise 22 percent up from 19 percent in 2019. FDI in the digital sector is growing but at a slower pace.
However, the government plans to more than double the FDI inflows to Nu 100B by 2029.
The government identified Information Technology or ITES as one of the main sectors, where 20 percent of FDI share must be in digital and knowledge sectors by 2029.
With Bhutan’s brand ‘Believe’, the government wants to attract knowledge-based FDIs and benefits in terms of technology, knowledge, and ideas. The most recent trend in FDI in the Asia-Pacific region is the rise of digital FDI.
Opportunities and Challenges
Bhutan is yet to tap into underutilised preferential market access opportunities and opportunities of the regional integrations, according to the Department of Industry under the Ministry of Industry, Commerce and Employment.
“There are opportunities in organic agriculture and agro-processing of high-value produce, manufacture of beverages, service industry such as IT or ITES, wellness centre, health and education, etc.,” an official from the department said.
With stability in the region, access to English speaking population, and pristine environment and Brand Bhutan, the country has the added advantage.
However, the official said that the country’s small market, high transportation cost, relatively young and narrow-base private sector, high cost of finance, the lack of skilled professionals and the need to import almost everything, starting from plant and machinery to most of the raw materials still pose challenges.
Other challenges are difficulty in acquiring government approval and bureaucratic delays, the FDI companies say.
President of the Bhutan Chamber of Commerce and Industry, Tandy Wangchuk said that the imposition of a sustainable development fee (SDF) of INR 1,200 for visitors including investors from India, Bangladesh and the Maldives and USD 200 per night from other countries is a major challenge for attracting FDIs.
“Even if there is relaxation in the FDI policy, if such impositions are not waived, we would not be able to address the issue,” he said, adding that the other countries try to give the best comfortable services to their investors.
Another challenge, a co-founder of DrukSmart, an ITES FDI company, Pema Tshering said is maintaining a valid bank account for the foreign co-owner, who is from India since his co-owners Bhutan bank account validity is tied to his work permit.
Pema Tshering said that his ex-pat partner who often handles export markets and works at customer locations in the Middle-east cannot have a valid work permit for Bhutan.
“Without a valid work permit, his bank account becomes invalid and cannot transact using Bhutan’s bank account,” he said.
The other challenge, he said is the long and complicated approval process in the financial system for the transfer of monthly daily subsistence allowance (DSA) or per diem.
Pema Tshering said that there is limited availability of banking infrastructure for cross-border payments for onsite salaries, DSA, and per diem for those working in export markets.
“Normally for project-based delivery, the duration of stay on site will be based on the project duration which can range from months to years and the limit of USD 3,000 per year quota for individual is not enough,” he said.
As per the Royal Monetary Authority’s foreign exchange operational guideline 2022, the cash limit for USD for a private traveller is USD 3,000 a year. Since February 6 this year, the quota has been revised to USD 1,000 in cash and USD 2,000 in cards.
With the large and growing market for IT services in the Middle-East region, Pema Tshering said that the Bhutanese local consultants have significant opportunities to generate hard currency as well as create employment.
To create a better environment for FDI in ITES, he suggests making internet more reliable and cheaper. “The current cost of internet is very high and is unreliable.”
According to him, the banking infrastructure has to improve to facilitate cross-border payments and offer incentives for ITES companies that generate export revenue and provide employment opportunities.
As an ITES company, Pema Tshering also said that the government has to support human capacity building and certification because employees are the only asset.
Lyonchhen Dr Lotay Tshering during the recent ‘meet the press’ said that the FDI companies are not willing to invest in Bhutan because the existing FDIs are unable to make profits.
With the current reforms, he said that the government is creating a conducive environment for FDIs, building skills in the domestic market to run the FDI businesses and making easier cross-border payments.
“A whole of a government approach with a clear strategy is required for promotion of FDI in the country,” an official from the department of industry said. “FDIs are also received from the existing investors who are already in the country.”
Ensuring a better business environment for those already in the business will also contribute towards attracting more investment through re-investment and word of mouth, the official said. “Enhancing promotional activities and constantly improving the environment of doing business could help bring in FDIs.”
According to the FDI report 2022, the 49 operating FDI projects employed 4,601 Bhutanese as of December last year.
In 2021, the operating FDI companies contributed Nu 1.3B in tax (salary tax, custom duties, and corporate tax). This was an increase of 63 percent as compared to the previous year.