Bhutan Policy Notes : Investment Climate Reforms
Bhutan’s investment climate is primarily constrained by imperfections in factor markets, limited access to product markets, and state dominance. Driven by the capital-intensive hydropower sector, the country achieved impressive growth rates, but cr...
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| Format: | Policy Note |
| Language: | English |
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World Bank, Washington, DC
2019
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| Online Access: | http://documents.worldbank.org/curated/en/302701564641532221/Bhutan-Policy-Notes-Investment-Climate-Reforms http://hdl.handle.net/10986/32290 |
| Summary: | Bhutan’s investment climate is primarily
constrained by imperfections in factor markets, limited
access to product markets, and state dominance. Driven by
the capital-intensive hydropower sector, the country
achieved impressive growth rates, but created few jobs. The
public sector stepped in, but has the capacity to absorb
only about 1,000 graduates per year. The 2017 Investment
Climate Assessment (ICA) survey revealed that employment
remains concentrated in agriculture and the public sector,
and that many firms are struggling to grow due to obstacles
that hinder investment, productivity, and international
trade. While some improvements in the investment climate
have been made, many challenges persist. Limited access to
finance, caused by both supply- and demand-side factors,
constrains the growth of firms, especially small firms. In
2015, the World Bank’s Enterprise Survey (WBES) conducted
detailed interviews with managers of 367 nonagricultural
firms in Bhutan. Managers, particularly of micro- and small
enterprises, most frequently cited access to finance as the
constraint that most inhibited firm growth. Lenders, on the
one hand, are discouraged by a lack of credit information
and by a complex, unpredictable, and ineffective
restructuring and insolvency regime. Borrowers, on the other
hand, are discouraged by high prices, poor quality, and
limited availability of financial services. Collateral
requirements hinder firm expansion, while the lack of a
clear insolvency framework remains a barrier. In the recent
past, the country has undertaken some reforms to improve its
investment climate but more needs to be done. The government
has taken measures to increase access to finance by
establishing a credit information bureau, three new
commercial banks, and a minimum reference rate for lending.
The country has also improved corporate governance and
administrative efficiency by: (a) enacting legislation that
requires companies to nominate independent board members and
set up an audit committee; (b) introducing dedicated benches
for commercial cases; and (c) simplifying business
registration. However, challenges remain in the provision of
finance, the ease of hiring labor, and access to markets. |
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