ADB estimates the GDP to grow by 4.5 percent this year

Thukten Zangpo

With the economic recovery, Bhutan has to create a conducive environment for the private sector development, while at the same time reducing dependence on the hydropower sector and state-owned enterprises (SOEs), according to Asian Development Outlook (ADO) 2022 released yesterday.

The ADO report estimated Bhutan’s gross domestic product (GDP) to moderately grow by 3.5 percent in 2021, as economic activity picked up following the government’s stimulus measures and steps to ease supply chain disruptions caused by Covid-19 pandemic.

With progressive relaxation of containment measures, including opening the tourism and other policy measures, the GDP is projected to grow faster to 4.5 percent in 2022 and 7.5 percent by 2023.

Asian Development Bank’s (ADB) country director, Shamit Chakravarti, said that Bhutan’s economy over the past decades had seen not much change in the economic structure or employment profile.

“Bhutan’s focus on hydropower as the main source of growth, exports, and foreign exchange earnings has come at the cost of a vibrant and competitive private sector,” he added.

According to the report, net foreign direct investment inflows to talled just 0.5 percent of GDP in the fiscal year 2019—low compared to other economies with similar per capita incomes such as Vietnam (6.2 percent of GDP), the Philippines (2.3 percent), and South Asia of 1.6 percent average.

Shamit Chakravarti said that the hydropower sector, which generated 57 percent of the government revenue on average from 2011 to 2020, contributed less than 2 percent to the total employment.

He said that Bhutan’s economy should be diversified as hydropower could take a beating from earthquakes and other disasters.

Shamit Chakravarti said that the agriculture (15 percent of GDP) employment share fell to around 50 percent, but the shift into industry did not translate to a higher industry share of GDP over the past decades.

The industry that contributes about 40 percent to GDP has an employment of less than 15 percent. The services sector contributed to 50 percent of GDP and employs about 30 percent, he said.

Shamit Chakravarti said that the manufacturing sector is supposed to generate a large number of jobs as the economy moves from agriculture to industries to services.

He added that the SOEs with preferential government finance are competing with the private sector.

“I am aware that the government would rationalise the number of SOEs, the role of SOEs, and make sure that they are not crowding out the private sectors,” Shamit Chakravarti.

Shamit Chakravarti said that the government must attract the private sector as a partner and investor in economic development, diversify the economy beyond hydropower, and reduce the oversized role played by the public sector.

Over the years, the government has undertaken policy reforms, simplified licensing requirements, and provided incentives for the private sector. The results, however, have not been encouraging, the report stated.

“Businesses continue to identify tight access to finance, high rents, erratic electricity supply, multiple licensing requirements, delays in getting clearances, and high-interest loans as the main obstacles affecting their operations,” the report added.

Simplifying licensing, reducing the number of clearances required, and reducing the cost of business to register are the measures to create conducive environment for the private sector, Shamit Chakravarti said.

He added that the ADB and government are working to update the commercial or insolvency law and make it more transparent to offer timely and cost-effective solutions for cottage and small industries (CSIs); small firms in financial distress should be considered.

“The CSIs that comprise 95 percent of the total industries need to be protected from bankruptcy since they are different from large companies. Law usually only focuses on the big players,” Shamit Chakravarti said.

Reforming technical and vocational education and training or balancing demand and supply in the job market to address very high levels of youth unemployment are also to be looked at, he said.

Shamit Chakravarti said that for a small country like Bhutan, many leaving for employment abroad was a matter of concern.

He also said that Bhutan must promote digitalisation, easier access to finance, and foster entrepreneurship.

Bhutan, he said, should take bold reforms for sustainable economic recovery and a strong growth trajectory. “We can draw comfort from the recovery, and the recovery will be on strong footings.”