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Bhutan: Market Profile

Picture: Bhutan factsheet
Picture: Bhutan factsheet

1. Overview

Bhutan is considered a development success story, with decreasing poverty and improvements in human development indicators. Hydropower construction and supportive fiscal and monetary policies, such as the 2016 Economic Development Policy and accompanying 2017 Fiscal Incentives Bill, are contributing to solid growth and low inflation. Nevertheless, structural challenges remain, such as large current account deficits, high public debt and an underdeveloped private sector.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

January 2015
John Kerry became the first-ever United States secretary of state to hold a cabinet-level meeting with a Bhutanese official when he met Bhutanese Prime Minister, Tshering Tobgay, in India.

October 2018
The third National Assembly elections to the lower house of the Parliament took place on October 18, 2018 with the Druk Nyamrup Tshogpa (DNT) party won the run-off election of the two-phase system. Lotay Tshering, the president of DNT, would be the new Prime Minister of Bhutan.

Sources: BBC Country Profile – Timeline, Fitch Solutions, The Indian Institute for Defence Studies and Analyses (IDSA)

3. Major Economic Indicators

Graph: Bhutan real GDP and inflation
Graph: Bhutan real GDP and inflation
Graph: Bhutan GDP by sector (2017)
Graph: Bhutan GDP by sector (2017)
Graph: Bhutan unemployment rate
Note: Data from World Bank more comprehensive than from IMF
Graph: Bhutan unemployment rate
Note: Data from World Bank more comprehensive than from IMF
Graph: Bhutan current account balance
Graph: Bhutan current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: November 11, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Bhutan merchandise trade
Graph: Bhutan merchandise trade

Sources: WTO, Fitch Solutions
Date last reviewed: November 11, 2018

Graph: Bhutan major export commodities (2012)
Graph: Bhutan major export commodities (2012)
Graph: Bhutan major export markets (2012)
Graph: Bhutan major export markets (2012)
Graph: Bhutan major import commodities (2012)
Graph: Bhutan major import commodities (2012)
Graph: Bhutan major import markets (2012)
Graph: Bhutan major import markets (2012)

Note: Latest direct data available is for 2012
Sources: Trade Map, Fitch Solutions
Date last reviewed: November 11, 2018

4.2 Trade in Services

Graph: Bhutan trade in services
Graph: Bhutan trade in services

Sources: WTO, Fitch Solutions
Date last reviewed: November 11, 2018

5. Trade Policies

  • Bhutan is not yet a member of the World Trade Organization (WTO). Its Working Party was established in October 1999, when the country started its WTO accession negotiations. The Working Party met for the fourth time in January 2008 (most-recent meeting), but progress has stalled due to the resistance of the previous government.

  • A WTO Reference Centre was inaugurated by Lyonpo Lekey Dorji, Bhutan's Minister of Economic Affairs, at the Department of Trade in Thimphu, Bhutan, on September 14, 2016. The Reference Centre will serve as a centre of information on WTO issues and international trade for government officials, the private sector, academic institutions and the general public.

  • Bhutan has an average tariff rate of 10%, the fourth highest in the South Asia region (out of eight countries), as well as numerous non-tariff barriers.

  • Various logistical and technical barriers exist to trade development and diversification in Bhutan. The main hurdle is the underdevelopment of Bhutan's supply chain. That said, market access and demand for Bhutan's goods and services are rather favourable due to the country's completely open access to the Indian market as part of one of the most liberal trade agreements in the world (meaning that Bhutan's trade with India is not restricted by tariffs or rules of origin). It also has duty-free and quota-free access to European and the United States markets as a Least Developed Country through the European Union's General System of Preferences and Everything But Arms programmes (although, so far, Bhutan has not been able to make full use of this facility). Nevertheless, the World Bank 2018 Ease of Doing Business Report ranks Bhutan 26th out of 190 states in the Trading Across Borders index.

  • Bhutan accepts sanitary and phytosanitary (SPS) measures of other countries using internationally recognised and accepted SPS approaches in practice. Since neighbouring countries tend to have similar pest and disease profiles, SPS barriers to trade tend to be relatively low. However, SPS barriers to trade with industrialised countries may be very significant.

Sources: WTO – Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

In June 2018, the seven-country grouping BIMSTEC (The Bay of Bengal Initiative on Multi-Sectoral Technical and Economic Cooperation) attended a two-day regional conference on 'Advancing BIMSTEC Cooperation'. The emphasis of the talks was on the need to conclude the free trade agreement (FTA) among the members of BIMSTEC to advance economic cooperation.

6.2 Multinational Trade Agreements

Active

  • Bhutan-India Bilateral FTA: The agreement covers trade in goods and entered into force in July 2006. Hydropower is the mainstay of Bhutan's economy, accounting for over 40% of total exports, with almost 90% going to India. Market access and demand for Bhutan's goods and services are rather favourable due to the country's completely open access to the Indian market as part of one of the most liberal trade agreements in the world. This highly liberal bilateral FTA features duty-free and quota-free trade and, therefore, trade with India is not restricted by tariffs or rules of origin. Beyond hydroelectricity exports to India, overall exports remain minimal and of low value. Most imported goods travel overland through India to get to Bhutan, and India accounts for nearly 95% of Bhutan's exports and nearly 80% of its imports.

  • South Asian FTA (SAFTA): SAFTA is a plurilateral FTA between Bhutan, Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka. The agreement covers trade in goods and originally entered into force in January 2006.

Under Negotiation

The BIMSTEC: BIMSTEC is a plurilateral FTA that is currently under negotiation. The agreement will focus on the trading of goods between Bhutan, Myanmar, Sri Lanka, Bangladesh, India, Nepal and Thailand. The bloc will bring together 1.5 billion people, or 21% of the world's population, and will have a combined GDP of more than USD2.85 trillion.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Bhutan FDI stock
Graph: Bhutan FDI stock
 
Graph: Bhutan FDI flow
Graph: Bhutan FDI flow

Note: No data available for outward FDI stock/flow
Source: UNCTAD
Date last reviewed: November 11, 2018

7.2 Foreign Direct Investment Policy

  1. Bhutan currently does not have an investment promotion authority. In its place, a Foreign Direct Investment (FDI) division has been established in the Department of Industry to provide focused support for FDI.

  2. As of May 2018, Bhutan had approved 64 FDI projects worth BTN34 billion since the country allowed foreign investment in 2002. The economic affairs ministry commented that 19 projects had been approved in principle from 2017 to Q1 2018; the total number of projects is 83. Sixty five percent of investors are from Asia, 25% from Europe, 9% percent from America with the remaining from the Oceania region. According to the Department's annual report, companies related to the FDI have created 4,871 jobs as of 2016, of which 93% are locals.

  3. 100% foreign ownership is allowed in the sectors of education services (except technical and vocational institutions), private health, five-star hotels, infrastructure, research and development, head office services and IT. Up to 51% foreign ownership is allowed in the financial services industry, while up to 74% foreign ownership is allowed in all other activities, except those in the Negative List, which include sectors such as media and broadcasting, the distribution of services in wholesale, retail and micro trade, and in mining and sales of minerals in primary or raw form.

  4. Foreign investment is given the same treatment as similar domestic investment, unless otherwise specified as above.

  5. Foreign firms may borrow from financial institutions in Bhutan and the debt-equity ratio shall be as per the provisions of the Royal Monetary Authority (RMA)'s prudential regulations.

  6. Foreign investors have the right to repatriate their invested capital and any capital gains secured in the currency of investment.

  7. FDI is encouraged in areas that contribute to the development of: the green and sustainable economy; the promotion of socially responsible and ecologically sound industries; the promotion of culturally and spiritually sensitive industries; investments in services that promote Brand Bhutan; and the creation of a knowledge society.

Sources: WTO – Trade Policy Review, ITA, US Department of Commerce, Kuensel

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Bhutan operates two industrial estates: the Pasakha Industrial Estate (272 acres) located in Chhukha district (southern Bhutan) and Bjemina Industrial Estate (34.4 acres) located in Thimphu district (western Bhutan).
 
Three new industrial zones are in the planning phase, which are going to be located in Samtse, Samdrup Jongkhar and Lhamoizingkhain in Dagana.
General business incentives (not limited to the industrial estates) include:

– Sales tax and custom duties exemption on manufacturing and service industries for import of plants and machinery.

– Sales tax exemption for permissible raw materials and primary packaging materials used by all manufacturing industries.

– Income tax exemption on earnings in convertible currency of business enterprises.

– Tax holidays for industries operating in sub-urban and remote areas.

– Tax rebates for technological upgrades beyond the minimum standard required by law.

– Industries that maintain higher environmental standards than legislated are provided additional incentives.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: Varies 5%-100%
  • Corporate Income Tax: 30%

Source: UNCTAD-ICC Investment Guides

8.1 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax- 30% on net profits.
- Losses incurred in a given year can be carried forward and then adjusted in the three following income years.
Withholding Tax2% for nationals holding a license, 5% for those without a license and 3% for non-nationals.
VAT- Plant and machine units - exempt

- Raw materials for manufacturing assembly (with a minimum of 40% value addition) - exempt

- 5% on cement

- 10% on hotel and restaurant services

- 30% on entertainment services

- 100% on beer
Rural Land Tax0.2% to 2.5% of land value
Property transfer5% of property sale value
Green Tax20% for passenger vehicles with 1800 cc and above and 5% for below 1,800 cc

Source: UNCTAD-ICC Investment Guides
Date last reviewed: November 12, 2018

9. Foreign Worker Requirements

In 2004, the National Assembly decided to limit the number of foreign workers in the country to 45,000. Thanks to the hydropower projects, there are more than 53,000 foreign workers in the country.

9.1 Foreign Worker Permits

Firms need approval from the Department of Labour to recruit foreign workers. Applications are approved within one week. Businesses hiring workers with Indian citizenship need to sign an agreement with their respective Regional Immigration Office. Approval for additional expatriate workers depends on whether a company made efforts to hire a suitable Bhutanese candidate. A firm needs to have documented two attempts to advertise and recruit for a Bhutanese worker locally.

9.2 Visa/Travel Restrictions

The policy 'High Value, Low Impact Tourism' makes travel to the Kingdom of Bhutan highly regulated to minimise the impact on the country's society and environment. Bhutanese policy ensures that only a limited number of tourists enter the country at any given time, preventing mass tourism and the alteration of the country's character.

Indian citizens do not need a visa to enter Bhutan due to the 1949 Treaty between the two states that allows for free movement of people between the two nations on a reciprocal basis.

Citizens of Bangladesh and the Maldives do not need a visa for Bhutan, as well as diplomatic passport holders of Switzerland and Thailand. All other passports require a visa to Bhutan.

Upon entry to Bhutan, all foreigners are issued a seven- or 14-day 'Entry Permit' that is valid for Thimphu and Paro only. The rest of Bhutan is considered a restricted area, and foreigners need a 'Restricted Area Permit' to enter.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not ratedNot rated
Standard & Poor'sNot ratedNot rated
Fitch RatingsNot ratedNot rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
71/18973/19075/190
Ease of Paying Taxes Index
28/18919/19017/190
Logistics Performance Index
135/160N/A149/160
Corruption Perception Index
27/17626/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank192/202
Short-Term Economic Risk Score46.340.842.1
Long-Term Economic Risk Score33.735.335.3
Political Risk Index Rank113/202
Short-Term Political Risk Score616160.4
Long-Term Political Risk Score5157.659.9
Operational Risk Index Rank85/201
Operational Risk Score52.151.451.6

Source: Fitch Solutions
Date last reviewed: November 11, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Hydropower construction and supportive fiscal and monetary policy in Bhutan have contributed to solid growth. Nevertheless, structural challenges remain, including large current account deficits, an underdeveloped private sector and a high youth unemployment rate. A delay in hydropower construction raises risks for macroeconomic prospects over the medium term.

During the recent elections, both parties proposed to increase the tax-free threshold for income taxes, as well as improve clean water access, healthcare and education, all of which will likely lead to an increase in the expenditure bill and a worsening of the fiscal deficit, which came in at 1.0% of GDP in FY2017/18. With public debt as a share of GDP at 106.6% of GDP in 2017, and high debt servicing, it is difficult to see how the future government would fund the widening shortfall.

OPERATIONAL RISK
The mining sector in Bhutan has the potential to be a major driver of economic growth and development. However, mining activities are on Bhutan's Negative List, which means that foreigners are restricted from engaging in mining activities and sales of minerals in primary or raw form.

The main reason for limited FDI inflow is the lack of attractive business opportunities in the country relative to its peers in the region. To be sure, 95% of Bhutan's manufacturing sector comprises small and cottage industries, which employ an average of four people per business. These businesses generally operate in publishing and printing, and the manufacturing of furniture, other wood-based products, and food and beverages. However, they lack economies of scale.

The landlocked and mountainous characteristic of the country, and its perilous air travel conditions make exports to regions apart from its neighbouring countries particularly difficult, and this would likely remain an impediment to manufacturing and, consequently, export growth over the long term.

Source: Fitch Solutions
Date last reviewed: November 12, 2018

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Bhutan short term political risk index
Graph: Bhutan short term political risk index
Graph: Bhutan long term political risk index
Graph: Bhutan long term political risk index
Graph: Bhutan short term economic risk index
Graph: Bhutan short term economic risk index
Graph: Bhutan long term economic risk index
Graph: Bhutan long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Political and Economic Risk Indices
Date last reviewed: November 11, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Bhutan Score51.644.548.550.962.5
South Asia Average41.643.738.943.440.5
South Asia Position (out of 8)15231
Asia Average48.750.647.746.350.1
Asia Position (out of 35)122415147
Global Average49.649.749.949.149.8
Global Position (out of 201)851321078854

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Bhutan vs global and regional averages
Graph: Bhutan vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Bhutan51.644.548.550.962.5
India50.044.651.061.842.8
Sri Lanka49.545.046.358.248.4
Maldives48.250.343.439.459.9
Bangladesh38.650.129.839.035.5
Nepal38.140.935.434.841.1
Pakistan34.536.936.843.121.4
Afghanistan22.337.320.119.712.3
Regional Averages41.643.738.943.440.5
Emerging Markets Averages46.848.047.545.746.0
Global Markets Averages49.649.749.9
49.149.8

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: November 11, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Bhutan

Graph: Major export commodities to Bhutan (2017)
Graph: Major export commodities to Bhutan (2017)
Graph: Major import commodities from Bhutan (2017)
Graph: Major import commodities from Bhutan (2017)

Note: Graph shows the main Hong Kong exports to/imports from Bhutan (by consignment)

Graph: Merchandise exports to Bhutan
Graph: Merchandise exports to Bhutan
Graph: Merchandise imports from Bhutan
Graph: Merchandise imports from Bhutan
Note: Data is taken from Trade Map as no data is available from the Hong Kong Census and Statistics

Note: Graph shows Hong Kong exports to/imports from Bhutan (by consignment)
Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions, Trade Map
Date last reviewed: November 11, 2018


2017Growth rate (%)
Number of Bhutan residents visiting Hong Kong1,260-6.0

Source: Hong Kong Tourism Board


2017Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,5383.5
Number of South Asians residing in Hong Kong36,6801.6

Sources: Hong Kong Tourism Board, Fitch Solutions, United Nations Department of Economic and Social Affairs – Population Division
Date last reviewed: November 11, 2018

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of Bhutanese companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

11.3 Chamber of Commerce (or Related Organisations) in Hong Kong

Bhutanese Consulate in Hong Kong
Address: Room 2205, Universal Trade Centre, 3 Arbuthnot Road, Central, Hong Kong
Email: enquiry@bhutanconsulate.hk
Tel: (852) 2810 1720
Fax: (852) 2810 8840

Source: Protocol Division Government Secretariat, Hong Kong

11.4 Visa Requirements for Hong Kong Residents

Hong Kong residents must obtain a visa clearance prior to travel to Bhutan. Visas are processed through an online system by a licensed Bhutanese tour operator directly or through a foreign travel agent.

Source: Tourism Council of Bhutan
Date last reviewed: November 12, 2018

Content provided by Picture: Fitch Solutions – BMI Research
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