Economic diversification key for Bhutan: World Bank report

Thukten Zangpo

Bhutan needs to diversify its economy beyond hydropower and reform its agriculture and financial sectors to ensure long-term economic growth and job creation for its youth, according to a new World Bank report, Bhutan Country Economic Memorandum.

The World Bank’s Permanent Representative to Bhutan, Adama Coulibaly, said economic diversification is critical for Bhutan to increase resilience, create jobs and sustain economic growth.

“By creating an environment conducive to entrepreneurship and promoting a programme that provides excellent training in targeted technical and vocational skills for the country’s youth, we can attract foreign direct investment and accelerate job creation in key sectors that can support the country’s economic growth ambitions,” he said.

He added that Bhutan can leverage its natural capital and international reputation as the first country in the world with a negative carbon footprint to spur green, resilient and inclusive economic growth.

The World Bank report states that despite Bhutan’s significant progress in combating poverty and promoting social development, structural transformation has been slow and employment opportunities, especially for educated and young people, are limited.

Between 2001 and 2019, the country recorded high real GDP growth, averaging 7 percent, largely due to the hydropower sector. In 2021

Hydropower accounts for more than a third of the country’s merchandise exports and domestic revenue, or 16 percent of GDP.

In recent years, Bhutan’s GDP per capita has grown at an annual rate of 6.3 percent, and its gross national happiness index per capita has reached $3,040, close to the World Bank’s upper middle-income threshold.

However, Bhutan’s economy has faced headwinds due to the COVID-19 pandemic and other global challenges.

The unemployment rate rose from an average of 2.8 percent between 2015 and 2019 to 5.9 percent in 2022, with urban and educated youth hardest hit.

The World Bank report identifies a number of obstacles to economic growth, including a small private sector, low productivity of microenterprises and labor market inefficiency.

The economy of countries that do not use hydropower is assumed to be largely service-oriented with a narrow range of resource-intensive manufacturing industries.

The average annual growth of the non-hydropower sector was 6.9 per cent between 2001 and 2019, driven by the services and non-hydropower sectors.

The report also points out that productivity growth is limited because a large part of the workforce is employed in low-productivity sectors such as agriculture and public services.

The agricultural labour market accounts for 40 per cent of the total workforce, followed by the public sector (25 per cent, including education and health services).

Hydropower, while essential, is capital intensive and does not create many jobs, employing less than one percent of the workforce.

“Diversifying the renewable energy mix by investing in solar, wind and geothermal energy could increase Bhutan’s clean energy potential, which would have a positive impact on the country’s green growth strategy,” the report said.

The large inflow of foreign currency from hydropower projects has led to an appreciation of the real exchange rate, a phenomenon known as the “Dutch disease”, which weakens the competitiveness of the non-hydropower sector, the report said.

Identifying key barriers To achieve higher growth, the report identifies three areas that require urgent action.

The report recommended facilitating economic diversification by supporting the development of non-hydropower sectors and the private sector. Economic diversification will benefit from allocating a much larger share of hydropower revenues to domestic investment in physical assets, including infrastructure and industry, the report said.

Currently, the majority (54%) of domestic revenues, of which 40% comes from hydropower, are absorbed by public spending on wages, goods and services, rather than financing investment.

The report also recommends increasing agricultural productivity and selective crop diversification and certification to facilitate access to niche markets. Increasing agricultural productivity through diversification into high-value crops in line with Bhutan’s comparative advantage can support a broader diversification process by freeing up labor for non-agricultural sectors and increasing agricultural exports.

The report also emphasises that financial sector reforms are crucial to supporting the process of economic diversification.

Recommends strengthening risk management practices, creating a level playing field for state-owned commercial banks and other commercial banks to ensure greater participation of private finance as key areas of reform.

“Financial inclusion is essential for inclusive growth,” said World Bank senior economist and report co-author Rangeet Ghosh. “In Bhutan, digital technologies can play a key role in promoting financial inclusion by enabling faster and more affordable domestic and international payment systems, facilitating collateral-free lending, and introducing innovative financial products.”