Although quite late, the government of Bhutan has realized the need for enhancing access to finances to foster private sector development.
In the aftermath of the elections in July 2013, Bhutan faced many political, cultural, religious and linguistic conflicts. However, after one year of upheavals, the country – known for inventing the term Gross National Happiness as the indicator of growth – is now witnessing signs of economic revival and political stability. After completing its first year in office, the second-ever elected government led by the People's Democratic Party, has taken a number of economic and political initiatives such as offering consumer loans to the public for housing and transport and strengthening trade ties with India.
Prime Minister Tshering Tobgay recently announced that the country’s economic expansion in 2014-15 would be driven by hydropower projects. He also pledged to pay special attention to solving the pressing problems of unemployment and the burgeoning external debt. Following the government’s policy, the Royal Monetary Authority of Bhutan – an independent body like a central bank – has recently announced guidelines for consumer loans for housing and transport to the masses to boost economic activity. This and many other steps show that Bhutan is striving hard to achieve fast economic growth, which had slowed down in the last few years.
According to the Asian Development Bank, growth in gross domestic product ( GDP) in Fiscal Year 2014 (ended June 30, 2014) was moderate at 6.5 percent, well below the average growth of 8.4 percent over the past decade. The slowdown, it says, was mainly “due to measures adopted to alleviate the growing shortage of Indian rupee reserves.” The measures entailed credit and import restrictions, particularly on import-heavy activities such as construction and transport that required large payments. It is, however, expected that in the coming years, GDP growth will again touch the mark of 8-9 percent as hydropower construction projects are underway under the 11th Five-Year Plan while improved economic conditions are likely to boost tourism. In FY2015, growth is forecast at 6.8 percent as the Dagachhu Power Plant will start functioning and exports are likely to increase.
The report confirms that a higher priority has been placed “on measures to diversify the economy." The public sector, especially hydropower, which was mainly responsible for the strong economic growth over the past five years, has long been the main source of economic expansion. However, with the poverty rate still high, the government has recognized that broad-based development is crucial. Taxation of personal and corporate income is moderate and relatively flexible employment regulations are a potential advantage for private-sector development.
The Himalayan country that made the transition from absolute monarchy to parliamentary democracy in March 2008 is one of the world’s smallest and least-developed economies. Up until a few decades ago, the country was largely agrarian, with few roads, little electricity and no modern hospitals. Rugged terrain posed a great challenge to infrastructure development. However, over the past decade, the economy of Bhutan has grown
remarkably with GDP tripling mostly on the back of capitalintensive hydropower development which has contributed 20.9 percent to GDP growth on average from 2000 to 2013. Recent interregional economic cooperation, particularly trade with Bangladesh and India, has also boosted economic growth in Bhutan – though connections to global markets are still limited.
Although the government has harnessed hydropower proceeds to substantially raise the standard of living of the Bhutanese, economic expansion in other sectors remains limited. In the past 13 years, productivity gains are confined to one industry that uses little labor. The ADB’s report highlights that in key employmentgenerating sectors there has been negligible growth, posing a challenge as 62 percent of the Bhutanese people work in agriculture, mainly for subsistence. Thus encouraging private sector development to create more jobs outside agriculture remains an important macroeconomic priority
towards achieving self-sufficient and inclusive growth, the ADB report concludes.
In terms of business development, the greatest constraint identified by small and medium-sized firms is the lack of access to finances, cited by over 30 percent of all firms. Accordingly, constraints on domestic credit to the private sector require attention. While deficiency in domestic savings for investment restrains the availability of credit, the distribution of existing credit is hampered by the risk-averse selection of clients in response to limited loan-recovery capacity, little variety in loan products, financial infrastructure shortfalls and client dispersion over rugged terrain. Further, external borrowing by the private sector remains severely restricted by law in terms of the borrower type as well as regarding the use of funds, effectively eliminating this as a source of funds for potential borrowers who face credit constraints in the domestic market.
Bhutan’s economic freedom score is 56.7, making its economy the 116th freest in the 2014 Index. This score has increased 1.7 points from last year, primarily due to improved scores in government spending and freedom from corruption. Bhutan is ranked 24th out of the 42 countries in the Asia-Pacific region, and its overall score is below the global and regional averages.
Since Bhutan’s economic freedom was first assessed in the 2009 Index, its progress in implementing more targeted reforms to advance economic freedom has been stagnant at best. Although the country has taken steps to modernize its economic structure and reduce poverty, only two of the 10 economic freedoms – trade freedom and freedom from corruption – have recorded improvement. The decline of about 10 points in both investment freedom and monetary freedom has kept the country in the category of “mostly unfree” in the Index.
The government of Bhutan has already realized the need for enhancing access to finances as a key policy measure to foster private sector development, employment growth and diversification. Its stimulus package aims to ease access to credit in priority development sectors such as cottage industries and the informal sector. Indeed, it is an important measure. The availability of a reliable credit information system offering a variety of financial products will certainly accelerate economic growth in all sectors creating more jobs and setting Bhutan on the right path to progress.