THIMPHU, September 6, 2024 - Bhutan has made impressive strides in poverty reduction, human development, and economic growth over the past decades, largely driven by its hydropower sector and Human Development policies. To sustain this momentum and create quality jobs for the youth, the country needs to diversify its economy beyond hydropower along with agricultural and financial sector reforms, says a new World Bank report.
The Bhutan Country Economic Memorandum identifies key barriers to higher growth and proposes actionable reforms. It identifies three areas of urgent action: (i) facilitating economic diversification by incentivizing the growth of non-hydro industries and the private sector; (ii) enhancing agricultural productivity and selective crop diversification and certification to facilitate access to niche markets; and (iii) undertaking financial sector reforms to complement the process of diversification.
"Economic diversification is crucial for Bhutan to increase resilience, create jobs, and sustain growth. By fostering a business enabling environment and promoting a program that provides excellent trainings on targeted technical and professional skills to the youth the country can attract Foreign Direct Investments and accelerate job creation in key sectors that can support the country's growth ambitions.", said Adama Coulibaly, World Bank Resident Representative for Bhutan. "Further, Bhutan can leverage its natural capital and international recognition as the first carbon negative country in the World to boost green resilient and inclusive growth."
The Covid-19 pandemic and other global challenges have exacerbated the difficulties facing the Bhutanese economy. The unemployment rate increased significantly affecting the urban and educated youth the most. The relatively small size of the private sector, its concentration in low-productivity microenterprises and some inefficiencies of the labor market have also been hindering employment opportunities.
While hydropower has been instrumental in Bhutan's development, its capital-intensive nature limits job creation and only employs less than 1 percent of the labor force. A diversification of the renewable energy mix with investments in Solar, Wind and Geothermal could increase the Kingdom's clean energy generation capacity with positive impacts on its green growth strategy.
Financial sector reforms will be critical to support the process of economic diversification. The report suggests strengthening risk management practices, creating a level playing field between state-owned commercial banks and other commercial banks to ensure greater contribution from private finance as critical areas of reform.
"Financial inclusion is essential for inclusive growth," said Rangeet Ghosh, World Bank Senior Economist and Co-author of the report. "In Bhutan, digital technologies can play a vital role in promoting financial inclusion, by enabling faster and more affordable national and international payment systems, facilitating collateral-free lending, and introducing innovative financial products."
