Challenges of Bhutan’s graduation from LDC
In December, with recommendations from the Committee for Development Policy (CPD), United Nations Developed Program (UNDP) at the Twelfth Round Table Meeting (RTM) in Thimphu declared, Bhutan would be graduated to be a developed country by 2021, which means Bhutan will have by then its all capability to sustain as a self reliant economy. For many, this would bring happiness while others a shattered dream. Further, there are many others who would accept this to be a big challenge to be achieved.
The policy makers and the political players in Bhutan will now face the biggest challenge to realise this dream. Failure of this target will obviously mean a failure of the democratic governance for those who love king’s comeback.
National Debt
The biggest challenge for Bhutan to achieve this would be to keep the national debt under control. Bhutan has not developed its capacity so far to pay off the debt at all and build a self-reliant economy. The country still needs foreign donations and loans for development activities. For instance, the government estimated in its 2013-14 budget that 85 per cent of the capital expenditure would be financed through foreign grants and aids.
In gross budget figure for 2012-13 fiscal year, 32 per cent was funded through foreign grants and aids while the following year the dependency increased to 36 per cent. The figure is the indication of Bhutan’s increasing dependence to foreign grants for development activities.
Today, individual Bhutanese carry the external debt of around Nu 143,000(a) , which would take around three years for repayment (considering their average salary scale). If you check at the gross figures of debt, the situation is alarming. The figure is rising in an unexpected trend. From the lowest in 1997, the debt rose to its peak in 2006. Despite slight decrease in the following years, the debt is rising in the last few years.
According to the International Monetary Fund, Bhutan had external debt of 84.86 per cent of GDP in 2006. It decreased to 66 per cent in 2008 and bounced back again to 71 per cent in 2010.
On the other hand, the annual report of the Royal Monetary Authority (RMA) 2013 says the country’s debt stands at Nu. 105 billion. If we compare the figure with the World Bank records, Bhutan’s economy has already shattered. While the national debt stands at Nu 105 billion, Bhutan’s GDP stands at around Nu 90 billion (US$1.78 billion). RMA in June said country’s outstanding external debt at that time stood at US$ 1.6 billion.(b)
Growth and inflation
Inflation plays a vital role in devaluating economic growth. We have seen the economic disasters in many European countries where inflation, one of the many other causes, could not be controlled.
Bhutan’s debt is increasing at an average rate of 3 per cent. Inflation rate and the GDP growth rate run parallel which essentially says the country is adding nothing to its national treasury. In average inflation is growing at 9.5 per cent and the GDP is growing at 10.2 per cent. This shows the actual growth of national economy is around 0.7per cent and is far below the rate debt is increasing.
Unless inflation is tamed, meeting the target is almost impossible. Inflation rate has improved in 2013 compared to 2012, dropping from 13.5 per cent to 5.5 per cent. However, this sudden fluctuation could not be considered an absolute positive signal. Inflation is greatly influenced by market economy in India and fluctuates according to market trend in India. Bhutan government has very little control over taming inflation.
This dependency is likely to drag Bhutan’s economic growth.
Hydropower and FDI
The only instrument of Bhutan’s economic growth is hydropower. In 2008-09 Bhutan’s newly elected government announced to produce 10,000 MW by 2020. Might not be intended but the announcement was looked at as competition with other Himalayan country Nepal where the new communist government had announced to produce 10,000 MW by 2020.
According to the government plans, these power plants should have been in operation by 2016-17. However, many of these plants are yet to start their construction. Few are still developing their DRP. Most contractors have postponed their targets of commissioning. At the current pace of development, it is very unlikely that Bhutan would even produce 75 per cent of the targeted hydropower capacity by 2020.
Bhutan has not sought to develop alternative to the hydropower as engine of the economic growth. Sticking to single source for income can be disaster for a country. Without alternatives, economic growth sustainability would remain a biggest challenge and risk. Bhutan is running through this knife-edge.
Hydropower is the biggest area Bhutan has foreign investments. Most of it comes from India. Despite relaxation of foreign investment policy in 2010, Bhutan failed to draw attention of the foreign investors. Thimphu Tech Park remains unoccupied even after years of completion. The Education City project is being dragged into controversies.
Employment
Lack of industrial expansion and economic diversification, employment is concentrated to hydropower sector. The hydropower projects are already saturated in terms of human resources. On the other hand, huge number of young generation is entering the market every year. University graduates are finding it harder to get a job.
According to UNDP, although Bhutan has achieved several of the Millennium Development Goals (MDGs) and is on track to achieve most targets by 2015, progress has been lagging in a few goal areas including employment, especially among the urban youth. While the overall unemployment rate of 2.1 per cent remains low, there has been a growing concern around issues of youth unemployment among policymakers and the public.
Taimur Khilji, from the UNDP Asia Pacific Regional Centre (APRC) highlighted that the rate of unemployment in 15-24 age group is considerably higher than the overall rate of unemployment in Bhutan. Further adding that, “The issue of youth unemployment is acute in Bhutan’s urban areas especially among the urban female youth population.” (c)
The government is seeking foreign employment opportunities to address the aggravating situation. Very recently, the first batch of Bhutanese youngsters left for Qatar. Employment agencies in Thimphu are getting their papers ready for government approval so they send more Bhutanese abroad for works.
The gulf countries are always in search of cheap labourers. Bhutan’s decision to open doors for overseas employment and to choose gulf countries as first destination clearly speaks the unemployment situation in Bhutan. On the other hand, government’s decision to open door is positive indication that it is serious to address the situation before it grows to uncontrollable.
Conclusion
Under such mountains of challenges, it’s harder for Bhutan to get promoted from the LDC by 2021. The politics has changed only recently. Open political activism is yet to begin. The political turmoil and instability across the region will obviously have on Bhutan. The political leadership has steered the country so far under ‘rule with fear’ policy. This won’t last long in open democracy.
It depends how effectively the political leadership addresses the unfolding situation and remain committed to their goal to achieve the status of a developed nation.
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a. Is the economy in risk of debt distress? Kuensel, January 18, 2014 http://www.kuenselonline.com/is-the-economy-in-risk-of-debt-distress/#.UutAI3eSy6w retrieved on Jan 31, 2014.
b. Selected Economic Indicators, Vol 27 No 2 (June 2013) published by RMA
c. Strategic interventions for Bhutan’s unemployed youth, UNDP, http://www.undp.org/content/bhutan/en/home/presscenter/articles/2013/11/20/strategic-interventions-for-bhutan-s-unemployed-youth-/ retrieved on February 1, 2014