Bhutan has evolved from a closed economy to a trading nation that exhibits a high degree of dependence on trade. The trade openness index was estimated to be around 75% in 2005/06 and reflects the Royal Government’s commitment to a liberal trade policy. The trade sector was also the highest contributor to national revenue and accounted for around one third of total national revenues in 2005/06, exceeding electricity revenue generation by a percentage point.
Exports have grown rapidly but overall the country’s trade deficit continues to widen due to an even faster growth in the value of imports. For most of past plan periods, the country has consistently been an import dependent economy with imports exceeding 60% to 70% of GDP. As a result of the huge and rising import bills, trade deficit climbed to a record Nu.10 billion in 2005/06 but has decreased thereafter. The export portfolio both in terms of products and markets is very narrow with the top ten commodities accounting for over 80% of the total export values and with 94% of these exports bound for India.
The Tenth Plan recognizes trade as a tool for economic growth and poverty alleviation. In view of the narrow trade portfolio in terms of products and destination markets, the country has been diversifying its trading base through the expansion of both bilateral and multi-lateral trading arrangements. This assumes particular importance in light of the fact that given that the small and limited size of the domestic market, the broad economic strategy must necessarily revolve around a natural resource export oriented strategy. Hence the RGoB’s efforts will focus on diversifying exports and trading markets through securing a better integration into the regional and international trading regime. Bhutan is currently a member of SAFTA and negotiations on the BIMSTEC Free Trade Agreement and accession to the WTO are at an advanced stage. Bhutan is also considering membership in the Bangkok Agreement. Bhutan shall continue to play an active role in all regional forums such as SAARC & BIMSTEC.
Opportunities and Challenges
Under the strategic framework of the Tenth Plan, the trade, manufacturing and services sectors represent the core areas of national industrial policy which is at the heart of the Tenth Plan’s development strategy to vitalize economic development and achieve poverty reduction. This represents a significant challenge in view of the critical and chronic constraints that restrict the further development of the sector relating to high trading costs, weak economies of scale, poor productivity, nascent and underdeveloped private sector, inadequate infrastructure etc. At the same time, the sector holds great potential that can effectively galvanize the economy and establish it on a truly sustainable basis.
In considering the trading environment and the country’s particular vulnerabilities arising from a non-diversified export base and market, the challenge will be to continue expanding the country’s non-hydro export base and export markets. Bhutan is further challenged by the need to enhance its convertible currency exports as future debt servicing in the context of foreign loans will be large and could potentially deplete foreign currency reserves.
With the rapid expansion of both internal and external trade, the legal instruments and framework for trading regimes are still nascent and will require to be strengthened to provide policy stability and predictability. Relevant laws and laws to promote competition and fair practices have not been enacted and will need to be done. Trading facilities and infrastructure too remain underdeveloped and weak and will need considerable strengthening to boost non-hydro exports.
Policy and Strategies
The main objectives of the Trade Sector for the Tenth Plan period are to:
Alleviate poverty through trade;
Enhance contributions from trade to the national economy;
Create a liberal and enabling environment for the growth of the private sector;
Pursue trade liberalization and support private sector development;
Enhance employment and revenue generation;
Ensure stable market access for Bhutanese products;
Promote competition and fair trade practices;
Promote efficient distribution of goods and services;
Strengthen institutional and professional capacity of the sector to fulfill its mandate;
Enhance growth of exports, particularly convertible currency exports.
In order to achieve the above objectives, the Trade Sector will employ the following strategies:
Establish an enabling legal framework through formulation and amendment of laws, simplification of administrative and licensing procedures and greater service orientation in the sector;
Strengthen long-term trade relations with principal trading partners and negotiate preferential trade treaties with new and potential trading partners;
Pursue trade liberalization through regional and multi-lateral frameworks;
Encourage trade in services including knowledge based and cultural industries;
Diversify export products and export markets through market studies and appropriate branding initiatives;
Develop industrial parks, dry ports, trade exhibition centers and business incubators to promote manufacture value added export base;
Collaborate with financial institutions to make export finance available;
Develop trade infrastructure and networking opportunities through access to e-commerce and web based information exchange facilities;
Facilitate the flow of trade through a trade facilitation mechanism;
Enhance skills and knowledge of the private sector in international trade through training courses, seminars and workshops;
Promote liberalization of the import regime;
Ensure competitive market conditions through streamlining of the distribution sector.