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Private sector growth poor, ADB

23 November 2009

Private sector in Bhutan has not been able to play a bigger and desired role even with substantial development in construction of major hydropower projects, according to Asian Development Bank’s (ADB) latest report.
The report titled “Countries in transition – A brief review of the emerging political economy of Bangladesh, Bhutan, the Maldives, and Nepal” states the government in Bhutan is contemplating a new industrial policy that assumes that, for private sector to grow, the government will need to extend its thinking beyond just hydropower projects and foreign aid.
The policy is likely to focus on framing clearer rules and regulations for private sector participation in the economy, and for incentives to ensure and enforce compliance.
The report emphasises the need for the government to concentrate on employability of labour, need for infrastructure, and policies on relevant exemptions. It also needs to properly target the sector’s reliance on foreign labour.
On external shocks
On the effects of global economic crisis on Bhutan, the report states that all economies are vulnerable to external shocks and Bhutan is no exception.
According to the report, the government feels the current global economic slowdown could affect tourism industry and possibly industrial development since external investors are likely to be cautious. However, it does not feel at this stage that it would have any substantial direct impact on the implementation of the 10th plan.
The report states that the global economic crisis has affected government’s ability to focus immediately on improving the business environment.
Nonetheless, Bhutan is cushioned by its economic relationship with India, and its exposure to the global market is not as severe as that of other countries, states the report.
Bhutan’s hydropower accounts to 32 percent of economic and 50 percent of total revenue. When the level of water falls, Bhutan receives natural shocks.
The dependency on one market for its hydropower exports could pose a risk, even though this is not immediately evident, the report states. Still, there has been continuous effort to promote economic diversification, for example, in tourism sector, which also serves to meet the employment-generation objectives of the government.
On WTO
The merits of joining the World Trade Organisation (WTO) has been debated, with some arguing that because the WTO promotes “consumerism”, it contradicts with the gross national happiness (GNH), development philosophy of the country.
Nonetheless, the government contends that WTO membership will help support GNH. There is awareness in government that accession carries costs.
The advantages of accession to WTO among other things are that Bhutan will gain access to predictable markets, the domestic market will see more cheap external goods, and rules-based dispute mechanisms can be within easy access.
On the negative side, however, the country will also, among other things, see a displacement of local production.
Increases in imports, facilitated by low or no import duties, mean short-term current account deficits will be greater.
And if exports do not increase correspondingly, the economy could face imbalances.
Accession to the WTO will require the country to fundamentally alter its thinking on how to sustain its exports. In agriculture, for example, Bhutan has been encouraged to move to niche products, to launch more concentrated marketing campaigns for its products, and to force import substitution.
When it is a member of the WTO, Bhutan will have to reduce, or completely abolish, tariffs issued on imports from other member countries. However, this is not expected to have direct dramatic impacts because the free-trade agreement with India already facilitates imports, and the low import tariffs do not form a big barrier to imports from other countries.
One particular impact of lower import tariffs is decreased government revenues.
But because revenues from import duties are not currently a substantial budget item, less than two percent of the total national revenue on average in the past half decade or so, this effect is not likely to be problematic.
On ease of doing business
World Bank’s doing business survey 2010, ranked Bhutan at 126 of 183 economies in ease of doing business.
The ease of doing business in Bhutan is not considered to be at par with that of the other countries in the region. This provides one of the constraints for private sector growth.
The doing business survey showed that, among the South Asian countries, Bhutan is better at enforcing contracts, employing workers, and registering property, but fares very poorly in ease of doing business and closing one, getting credit, and, most worryingly, protecting investors.
On loans
Bank’s non-performing loans are other worrying areas for the government which is in some ways more susceptible to the global crisis. Report, shows that bad loans with banks and non-banking financial institutions jumped significantly to Nu 2.54 billion by June 2008 from Nu 1.79 billion in 2007, or 13.35 percent of total loans, and the highest in eight years.
The highest portion of bad loans is in the housing sector, at 21.5 percent, where the banks have a predilection to lend given a high level of collateral, which provides them with some measure of security.
The situation results from a weak credit policy and unsatisfactory monitoring and loan recovery.
The country still faces the challenges of unequal development in rural and urban sectors, youth unemployment and rural poverty, according to the report.

Private sector in Bhutan has not been able to play a bigger and desired role even with substantial development in construction of major hydropower projects, according to Asian Development Bank’s (ADB) latest report.

The report titled “Countries in transition – A brief review of the emerging political economy of Bangladesh, Bhutan, the Maldives, and Nepal” states the government in Bhutan is contemplating a new industrial policy that assumes that, for private sector to grow, the government will need to extend its thinking beyond just hydropower projects and foreign aid.

The policy is likely to focus on framing clearer rules and regulations for private sector participation in the economy, and for incentives to ensure and enforce compliance.

The report emphasises the need for the government to concentrate on employability of labour, need for infrastructure, and policies on relevant exemptions. It also needs to properly target the sector’s reliance on foreign labour.

On external shocks

On the effects of global economic crisis on Bhutan, the report states that all economies are vulnerable to external shocks and Bhutan is no exception.

According to the report, the government feels the current global economic slowdown could affect tourism industry and possibly industrial development since external investors are likely to be cautious. However, it does not feel at this stage that it would have any substantial direct impact on the implementation of the 10th plan.

The report states that the global economic crisis has affected government’s ability to focus immediately on improving the business environment.

Nonetheless, Bhutan is cushioned by its economic relationship with India, and its exposure to the global market is not as severe as that of other countries, states the report.

Bhutan’s hydropower accounts to 32 percent of economic and 50 percent of total revenue. When the level of water falls, Bhutan receives natural shocks.

The dependency on one market for its hydropower exports could pose a risk, even though this is not immediately evident, the report states. Still, there has been continuous effort to promote economic diversification, for example, in tourism sector, which also serves to meet the employment-generation objectives of the government.

On WTO

The merits of joining the World Trade Organisation (WTO) has been debated, with some arguing that because the WTO promotes “consumerism”, it contradicts with the gross national happiness (GNH), development philosophy of the country.

Nonetheless, the government contends that WTO membership will help support GNH. There is awareness in government that accession carries costs.

The advantages of accession to WTO among other things are that Bhutan will gain access to predictable markets, the domestic market will see more cheap external goods, and rules-based dispute mechanisms can be within easy access.

On the negative side, however, the country will also, among other things, see a displacement of local production.

Increases in imports, facilitated by low or no import duties, mean short-term current account deficits will be greater.

And if exports do not increase correspondingly, the economy could face imbalances.

Accession to the WTO will require the country to fundamentally alter its thinking on how to sustain its exports. In agriculture, for example, Bhutan has been encouraged to move to niche products, to launch more concentrated marketing campaigns for its products, and to force import substitution.

When it is a member of the WTO, Bhutan will have to reduce, or completely abolish, tariffs issued on imports from other member countries. However, this is not expected to have direct dramatic impacts because the free-trade agreement with India already facilitates imports, and the low import tariffs do not form a big barrier to imports from other countries.

One particular impact of lower import tariffs is decreased government revenues.

But because revenues from import duties are not currently a substantial budget item, less than two percent of the total national revenue on average in the past half decade or so, this effect is not likely to be problematic.

On ease of doing business

World Bank’s doing business survey 2010, ranked Bhutan at 126 of 183 economies in ease of doing business.

The ease of doing business in Bhutan is not considered to be at par with that of the other countries in the region. This provides one of the constraints for private sector growth.

The doing business survey showed that, among the South Asian countries, Bhutan is better at enforcing contracts, employing workers, and registering property, but fares very poorly in ease of doing business and closing one, getting credit, and, most worryingly, protecting investors.

On loans

Bank’s non-performing loans are other worrying areas for the government which is in some ways more susceptible to the global crisis. Report, shows that bad loans with banks and non-banking financial institutions jumped significantly to Nu 2.54 billion by June 2008 from Nu 1.79 billion in 2007, or 13.35 percent of total loans, and the highest in eight years.

The highest portion of bad loans is in the housing sector, at 21.5 percent, where the banks have a predilection to lend given a high level of collateral, which provides them with some measure of security.

The situation results from a weak credit policy and unsatisfactory monitoring and loan recovery.

The country still faces the challenges of unequal development in rural and urban sectors, youth unemployment and rural poverty, according to the report.

By Rabi C Dahal

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