The Diagnostic Trade Integration Study Update 2020 has emphasised the need to diversify trade not only in terms of products, but also trading partners.
Launched in Thimphu yesterday, the report states that despite sharing borders with the two fastest-growing Asian economies of India and China, the trade dependency on the former exposes Bhutan’s economic volatility and creates currency risks that come due to unfavourable moves in exchange rates.
The study, however, states that the extent to which meaningful diversification away from the Indian market by product and destination is desirable and possible has to be looked into.
An alternative is that the existence of such a strong trading relationship that Bhutan shares with India should be acknowledged and maintained with product diversification pursued as a priority over geographic diversification. Both options can be pursued simultaneously, the report states.
It states that it is to Bhutan’s advantage that it borders the fastest growing and most dynamic Asian economies, which are also the two biggest countries in the world by population. “India is by far Bhutan’s biggest trading partner, accounting for more than 85 percent of the country’s merchandise exports and almost 80 percent of imports.”
The report has made several recommendations including establishing an economic development board to improve the economy.
The board would operate as a statutory body semi-autonomously from government, with the mandate of promoting investment and exports and enhancing Bhutan’s ability to benefit from trade.
The board would perform activities such as training in trade and investment for all the ministries and relevant agencies, conducting policy advocacy, image building and investor targeting and aftercare, and trade promotion using the latest techniques, as well as reducing bureaucratic barriers to domestic and foreign investment.
A dedicated institution, fully staffed, would address these aims as well as possibly helping improve economic statistics, the report states.
The study recommended focusing more on product diversification in appropriate areas rather than to devote continued effort and expense to geographic diversification given the absence of success in diversification so far.
The main drivers of economic activities remain the production and export of hydropower-produced electricity and ferro alloys. However, they are on the decline.
The study states that Bhutan is a relatively capital-rich, labour-poor, by quantity not skills country with a small domestic market.
“This places relative emphasis on capital-intensive, high-productivity, skills-rich export activities,” it states, adding that low-productivity, low-wage agricultural activities, particularly those serving the domestic market, have less potential.
The report also points out that particular opportunity exists in ICT-enabled services, not only as exports in themselves but as infrastructure and sources of linkages, which the success of Thimphu TechPark has proven.
The report highlights that not enough has been done to improve data on either trade or investment since 2012.
Broadly, data on trade and investment need to be improved by developing the government’s capacity to generate, analyse and disseminate statistical information, making it immediately available online and ensuring harmonization between national and international sources, it recommends.
The close relationship and liberal trade regime with India have helped facilitate the main driver of economic activity, the production and export of hydroelectricity.
The report states that Bhutan’s efforts to diversify into potential priority exports may be limited by the possible increase in duties after its graduation. “Yet, for current major products, diversifying into other markets is not likely to be affected by a possible loss of preferential tariffs.”
The report was produced by the economic affairs ministry and the UNDP Bhutan under the auspices of the Enhanced Integrated Framework (EIF), which is a global development program with the objective of supporting least developed countries to better integrate into the global trading system and to make trade a driver for development.
Tengye Lyonpo (Economic Affairs Minister) Loknath Sharma, at the launch of the report, said that the study would give a way forward for the government not only on economic recovery but also on the long-term economic goals.
The report, he said, had come at the right time, as the economy needed recovery.
Lyonpo Loknath Sharma said that ICT would help Bhutan overcome the challenges of being a small economy.
He expressed his commitment to implement the recommendations of the report. “The impact of the study should be relevant and visible.”
UNDP’s resident representative, Azusa Kubota, said that the study aimed to contribute to addressing challenges faced by the economy.
She said the pandemic, had dramatic consequences not only for tourism but also the broader economy including for the private sector diversification and employment.
She expressed the UNDP’s commitment in the country’s development.
The executive director of Enhanced Integrated Framework, Ratnakar Adhikari (PhD), said that while the Covid-19 pandemic had a negative impact across various sectors, it had created a window of opportunity for Bhutan to accelerate its efforts in establishing a digital ecosystem, not only as an immediate response to the crisis but also to build resilience to the future crisis.
“The widespread integration of digital solutions across the nation’s priority sectors would be key,” he said.