Bhutan seeks out sustainable foreign investment

Authors: Mohammad Sultan Ahmad Ansari, Modern College of Business and Science and Shad Ahmad Khan, University of Buraimi

Foreign Direct Investment (FDI) has been a crucial driver of economic growth in developing countries. Bhutan, a small and landlocked country with limited natural resources, has recognised the importance of FDI in boosting its economic growth. But the Bhutanese government has adopted a cautious approach towards FDI, as it believes that FDI should align with its unique development philosophy of Gross National Happiness.

Bhutan has mainly attracted FDI in the hydropower sector, which is one of its major sources of revenue. The government has also tried to diversify the economy by promoting sectors such as tourism, agriculture and manufacturing. But inadequate infrastructure, limited skilled labour and bureaucratic hurdles have hindered the inflow of FDI into these sectors.

To foster economic efficiency and competition, Bhutan has been gradually privatising its state-owned enterprises by divesting its shares through public offerings and strategic sales. This process has been slow due to resistance from stakeholders such as employees and local communities.

While it is generally believed that FDI facilitates a country’s growth, the impact of FDI and disinvestment on Bhutan’s economic growth has been mixed. While FDI in the hydropower sector has contributed significantly to the country’s GDP growth, the lack of diversification has made the economy vulnerable to external shocks. The slow pace of disinvestment has also limited the private sector’s participation in the economy.

Bhutan has traditionally been a closed economy, with limited foreign investment. In recent years, the government has taken steps to attract more FDI, particularly in sectors such as tourism and information technology. The government’s FDI Policy 2019 promotes investment in areas that maximises Gross National Happiness, including green industries, culturally and spiritually sensitive industries, and industries that contribute to the creation of a knowledge society. FDI inflows have increased, but the overall level of investment remains lower than in other developing countries.

Bhutan’s Sustainable Hydropower Development Policy 2008 sets the limit for FDI at 74 per cent of equity for medium size hydropower projects and 100 per cent for large projects. International companies such as Dagachu and Basochu will be given the mandate of promoting, developing and maintaining Bhutan’s major hydropower assets sustainably. Bhutan had expected to produce an additional 10,000 megawatts of electricity from hydropower by 2020 but achieved less than a quarter of this target with a total installed capacity of 2326 megawatts in 2020, up from 1480 megawatts in 2008.

The positive impact of FDI on Bhutan’s economy has come through its impact on the hydropower sector. The construction of hydropower projects has boosted the country’s infrastructure and increased electricity production, leading to a reduction in the cost of electricity and a more reliable power supply. This has had a ripple effect on other industries that require a reliable power supply, such as manufacturing, production and industrial establishments.

FDI could support Bhutan’s economic development in several ways. First, FDI could contribute to technology transfer and enhance the productivity of Bhutan’s agriculture and forestry sectors. For example, foreign companies could bring in modern irrigation systems, farm machinery and other technologies to enhance the quality and quantity of crop yields.

Second, FDI could help Bhutan’s agriculture and forestry industries gain access to international markets.

Third, an increase in FDI would promote the establishment of value-added industries such as food processing units. These new industries would create employment opportunities for the local population.

Any FDI in Bhutan should align with these goals and prioritise the sustainable use of natural resources. The government should also put in place appropriate regulations to ensure that FDI does not have negative impacts on Bhutan’s environment and social fabric.

Despite the recent rise in FDI, Bhutan is not in a position to attract a large amount of FDI due to its small size and largely agricultural economy. India is the largest source of investment, followed by Singapore and Thailand. Bhutan recorded a 40 per cent decline in FDI in 2021.

Bhutan needs to strike a balance between attracting FDI and preserving its unique development philosophy of Gross National Happiness. The government should focus on diversifying the economy and promoting sectors that have the potential to attract FDI. At the same time, the government should continue to privatise state-owned enterprises to promote competition and efficiency.

An increase in FDI would have a positive impact on Bhutan’s economy. But disinvestment, particularly in the mining sector, has negatively impacted on the country’s economic growth. The Bhutanese government needs to create a more favourable investment climate to attract more FDI and encourage domestic investment, while also addressing environmental concerns and ensuring sustainable development.

Mohammed Sultan Ahmad Ansari is Assistant Professor of Business and Economics at the Modern College of Business and Science, Oman.

Shad Ahmad Khan is Assistant Professor of Business at the University of Buraimi, Oman

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