Grow­ing Pains

Although quite late, the gov­ern­ment of Bhutan has re­al­ized the need for en­hanc­ing ac­cess to fi­nances to foster pri­vate sec­tor de­vel­op­ment.

Southasia - - CONTENTS - By Huza­ima Bukhari & Dr. Ikra­mul Haq The writ­ers, part­ners in law firm Huza­ima & Ikram (Taxand Pak­istan), are ad­junct fac­ulty mem­bers at the La­hore Univer­sity of Man­age­ment Sciences.

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.

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