Bhutan To Revise 3rd Foreign Direct Investment Policy To Diversify Its Economy And Be More Investor-Friendly

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Most of the FDI companies are in the hotel sector today, therefore it is important for us to diversify.

Zorig Chusum: The Thirteen Traditional Crafts of Bhutan. (Source: Facebook/Zorig Chusum)

 

By Chencho Dema Business Bhutan

Currently, the majority of Bhutan’s Foreign Direct Investment (FDI) projects are concentrated in the hotel industry.

By diversifying the FDI projects, the government hopes to attract more investments in the small and medium industries by lowering the investment threshold.

The government is in the process of revising the Foreign Direct Investment (FDI) Policy 2010 to make the investment climate in Bhutan more conducive and investor-friendly.

 

Graphic: FDI Annual Report 2017

 

With this, the FDI policy will be revised for the third time. The Druk Phuensum Tshogpa government revised the policy in 2010 while the People’s Democratic Party government followed suit in 2014.

The earlier amendments to the policy were made to realign the FDI regime with the changing needs of the economy and to attract more foreign investments to drive growth.

Reasons for revising the FDI policy set in 2010

According to the Economic Affairs Minister, Loknath Sharma, the FDI policy is being revised to address existing issues and challenges faced by FDI companies in Bhutan and potential foreign investors.

“The current FDI policy is not attractive enough as there are a few areas which we need to relook,” said the Lyonpo.

“There are several limitations in the present policy. We need to revise and relook into certain sectors where there are no investments.”

The revision of the FDI policy will also address the issues of remittance, immigration permits pertaining to the duration of stay for foreign workers in the country, challenges with the exchange of convertible currencies as well as procedures to register a FDI company.

Foreign Direct Investment in Bhutan from 2015-2018:

Graphic: Royal Monetary Authority of Bhutan

 

The revision also intends to attract the FDI in small sectors. To this end, the new policy would look into lowering the investment threshold to encourage investments in the Cottage and Small industries (CSIs).

An overview of the Cottage and Small Industries in Bhutan

The CSIs constitute more than 90% of the total industry in Bhutan. As of 15 June 2018, there were 20,195 licensed and operational cottage and small industries in the country as compared to 16,887 as of June 30, 2017.

A total of 3,308 licenses were issued in the 12-month period. The CSI in Bhutan is categorised into three sectors: Service, Production and Manufacturing (P&M) and Contract.

The industry in Bhutan is dominated by the service sector which accounts for more than 78.9% of the total number of cottage and small industries.

The Production and Manufacturing (P&M) sector accounts for only 10.47%. Nonetheless, the P&M sector recorded an impressive growth of 27% in the 12-month period. The service sector also recorded a growth of 19 % followed by the contract sector at 16 % (See table below).

Breakdown of CSIs in Bhutan by sectors:

Graphic: Department of Cottage & Small Industry Annual Report 2018

 

“We need to attract FDI in our small sector because we are terribly in shortage of financing and local banks are not able to do it. We also lack in technology, knowledge and skills. The FDI companies would help with technology and knowledge transfer,” said the Economic Affairs Minister.

The policy revision will also look into streamlining services related to the FDI through a single window that will house all key FDI service providers.

The benefits which FDIs have contributed to Bhutan

In 2018, 16 new FDI projects were approved, taking the total FDI projects in the country to 73. The total capital inflow from foreign investors stood at Nu 22.2mn and US$ 6.2 million in 2017 alone. As of 31 December 2017, the operation of FDI companies in the country contributed Nu 1.56bn in tax revenue.

The FDI companies currently employ 5,307 employees, of which only 190 are foreign workers – that is equivalent to 23 Bhutanese for every foreign worker.

A majority of the FDI projects (42%) is in the hotel sector followed by the Information Technology and Information Technology Enabled Services (15%).

A staggering 64% of FDI projects approved are located in Paro, Thimphu and Phuentsholing, with the highest concentration (34%) established in the capital, Thimphu.

 Graphic: FDI Annual Report 2017

 

“Most of the FDI companies are in the hotel sector today, therefore it is important for us to diversify the FDI attractions from the hotel industry to other sectors such as education, health and agriculture including small industries,” said the Economic Affairs Minister.

In terms of FDI projects by investor type, 72% are private companies, 19% individual investors and 9% institutional and state owned enterprises.

Around 64% of the investors are from Asia alone. India is the major source of investments with 51% followed by Singapore (15%) and Thailand (13%).

According to the Economic Affairs Minister, the FDI would be instrumental in the diversification of the economy and the revision of the policy would lead to the redistribution of investments in other sectors.

“We want to make the FDI policy convenient and conducive for foreigner investors,” said Lyonpo Loknath Sharma.

Graphic: Department of Cottage & Small Industry Annual Report 2018

 

“FDI is one way to expose the Bhutanese economy to the outside world and create employment as well to train and develop the country’s human resources.”

Lyonpo added that since Bhutan will be graduating from the Least Developed Country category, the 12th Five Year Plan focuses on diversification of the economy.

“We have high economic vulnerabilities and we need to make our economic base strong to address these vulnerabilities. That is why diversification has become a priority but without foreign investors, it would be very difficult because we have limited internal resources,” the Lyonpo said. 

 

This article first appeared in Business Bhutan and has been edited for Daily Bhutan.

 


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