Last Updated 17 Dec 2022

GDP Growth and Supply Side Policy in Buhtan

Category Bhutan, Finance
Words 1059 (4 pages)
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GDP or Gross Domestic Product is the method used to measure a country’s economy and it is the entire cost of production by all the companies, manufacturers, and the citizens of that country.  When a foreign company produces goods in the country that production is accounted for a part of its GDP.

The fastest growing countries aren’t always the largest, or highest on the most developed list, and Bhutan, a primarily Buddhist empire in Asia mostly known for its monasteries and vast green landscapes that range from subtropical plains to steep mountains and valleys is one such nation whose GDP has seen strong growth rates over the past ten years and is considered amongst one of the fastest growing economies in the world, although, Bhutan measures its well-being by looking at results of the country’s Gross National Happiness (GNH) which is a philosophy that guides the government and measures the collective happiness and well-being of the population.

Typically when Asia is discussed, people tend to think of India and China whose economies have strongly grown in the past as well, however, in the recent years compared to their past track record they have lost the momentum, but Bhutan, a small nation in the middle of these two countries grew 17.9 percent in 2008, slowing down in between 2010 and 2014 after the shortage of the Indian rupee in 2012, but since then has seen an upward trajectory, after recovering in 2016 to 6.7 percent and is now expected to grow around 11 percent each year between 2018 and 2020.

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The most important areas which have contributed to Bhutan’s GDP growth are hydroelectricity, tourism and agriculture. Because of its geographical location among the mountains, it has been difficult for the country to develop its infrastructure therefore the government has instead planned to generate revenues by utilizing its natural resources, and has strategically focused on quality tourism as a major revenue stream, but at the same time, it is also controlling the number of people it allows as tourists to protect its environment and lessen foreign influence on its citizens to guard its culture and way of living.  Also because of its mountainous terrain and its ability to produce hydroelectricity, Bhutan sells majority of its energy power to India, who is not only its closest ally but also their largest source for earnings (90 percent).

Bhutan however has high labor costs compared to its neighboring countries, and that is because it is much smaller in size in the form of land mass and population.  Bhutan was said to lack an educated and skilled workforce needed to support its hydroelectricity production plan, which was an obstacle in creating higher productivity needed to remain competitive with neighboring Asian countries.  The government however in recent years, has identified and begun to address these issues by enabling an environment friendly for businesses, by launching its Economic Development Policy in 2010 (www.moea.gov.bt).  This policy’s purpose is to improve productivity in the economy and provide strategic direction through 2020.

The government is also currently promoting the private sector after a heavy focus on the public sector for years, which is creating jobs by encouraging local hiring to bring the youth unemployment rates down versus sourcing cheaper labor from neighboring countries.

Accelerated investments in hydropower and good agriculture yields have created a growth in the country’s capital along with macroeconomic stability, which have allowed the fiscal and monetary policies to continue to support various economic activities.  Bhutan has made great strides in modernizing its economic structure and has a record of reducing extreme poverty down to 2 percent, which is among the lowest rates in Asia.

The already low unemployment rate is at 2.5 percent today compared to 2.9 percent in 2013 and the country is at a moderate external debt risk.  Under the country’s 11th 5-year plan “goals of promoting green-socio economic development and achieving self-reliance are a focus”, (www.worldbank.org).  This policy has a plan to endorse fiscal discipline, increase access to finance for enterprises, and improve the climate for foreign business entry and investment in the country.

The Royal Monetary Authority (RMA) entrusted by RMA Act of 1982, creates and regulates all monetary policies in the country, which include achieving and maintaining price stability, laws that oversee brokers, insurance companies and bankruptcies.

Along with the local currency the Ngultrum, the Indian rupee is also in circulation and widely accepted.  “In the pursuit of price stability, the cornerstone of Bhutan’s monetary policy is that of Exchange Rate targeting”, (www.rma.org), therefore the national currency is made sure (pegged) to be at the same rate as the Indian rupee since majority of Bhutan’s transactional activity is with India.  Inflation was high reaching 13.53 percent between 2012 and 2014 coinciding with low GDP during the same time, due to shortage of the Indian Rupee, however since then it has trended downward and currently at 4 percent.  The interest rate decisions are also taken by the Royal Monetary Authority of Bhutan and the official interest rate is a policy rate and is benchmarked at 6 percent.

The portion of foreign direct investment (FDI) in the GDP of Bhutan remains rather low compared to other developing countries.  If we look at stock, FDI represents less than 10 percent of GDP and because of the country’s geographical location and it being a land-locked mountainous region, it has been difficult for foreign investors to come in and invest in infrastructure. But regardless of location, FDI investment in general has been discouraged in the past due to a controlled system and lack of policy in areas of industrial license and trade.

In 2015, the government declared to relax the rules associated with foreign investment and therefore is now allowing foreigners to buy land” (www.santandertrade.com), however, the government of Bhutan clearly speaks to continue restricting FDI in other sectors in order to avoid competition with local traders.

Bhutan is ranked 73rd out of 190 countries in the World Bank's 2017 Doing Business Report. For a small interior country, this ranking is nonetheless satisfactory and the country has been most active in South Asia in relation to leading reforms and simplifying procedures for the betterment of the country and its people. This country that measures its progress by measuring the its populations gross national happiness, has all the right cards in place to continue to grow its GDP, and advance along with its neighboring countries.

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