Publication: Bhutan Policy Notes: Investment Climate Reforms

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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.
World Bank. 2019. Bhutan Policy Notes; Bhutan Policy Notes : Investment Climate Reforms. © World Bank, Washington, DC. License: CC BY 3.0 IGO.
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