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I. Recent Economic DevelopmentsA. Growth, Employment, Savings, and Investment1. Economic Growth and the Structure of Production1. During the past 5 years, Bhutan’s real average gross domestic product (GDP) grew by 6.7% per annum (Table 1). In that period, agriculture sector grew by 3.7% per annum, industry by 9.6%, and services sector by 7.2%. Economic growth could have been higher during this period without the floods of 2000, which lowered the growth rate for that year to a below-trend rate of 5.3%. Flooding, which was concentrated in the south of the country, adversely affected industrial production, which was suspended for almost 3 months. Thus, industry's growth rate declined to 2.3% in FY2000, before making a smart recovery in FY2001. In terms of sectoral composition of GDP, during the past 5 years, the average annual shares of agriculture and industry at about 35% each were closely followed by those of the services sector, which posted an average annual share of about 30% (Figure1).
2. Within the sectors, however, there were variations. For example, the main impetus for growth in agriculture came from the forestry and cash crop subsectors. In industry, growth was mainly on account of the hydropower sector, followed by the construction sector. When viewed over a longer time frame, there is, as expected, a secular decline in the contribution of agriculture to GDP (from over 50% in 1981 to 35% in 2002), and a corresponding rise in the share of industry to GDP (from 17% in 1981 to 36% in 2002). 3. In recent years, the main drivers of GDP growth have been hydroelectric power, construction, and transport. Bhutan has a large hydropower potential with an estimated capacity of 30,000 megawatts (MW). The development of the sector began with the commissioning of the first stage of Chhukha plant (336 MW) in 1986 and the initiation of power exports to India. This was followed by the completion of the 60 MW capacity Kurichu plant and then by Basochu (60 MW) in 2004 and the Tala hydropower station (1,020 MW) by end-2005. The hydroelectric sector accounts for some 12% of GDP and 45% of the Government revenues. Within the power sector, the Chhukha Hydropower Corporation (CHC) is the single largest source of revenues for the Government (Figure 2). In FY2002, CHC revenues amounted to 39% of total national revenues. Growth in the construction sector is mainly on account of downstream activities related to the construction of Basochu, Kurichu, and Tala hydroelectric power stations. While construction-related work is gradually tapering off as the first two stations near completion, it is in full swing at the 1,020 MW Tala hydropower plant, which is expected to be completed by end-2005. In the services sector, the transport and communications sectors, as well as the financial sector have performed somewhat below the annual targets. The contribution of tourism, the largest source of hard currency earning, is not separately identified in the national accounting framework. However, the sector has made important strides and is likely to flourish further under the recently announced incentives for attracting greater foreign direct investment in the country.
4. The NFYP was launched on 1 July 2002. It envisages an annual average growth rate of 7-9%.1 The NFYP emphasizes strengthening infrastructure, improving the quality of socialservices, ensuring good governance, promoting growth of the private sector, generating employment, and preserving and promoting culture and the environment. Compared with the previous plans, decentralization of development expenditures to the dzonkhags (districts) and gewogs (village blocks) is an important hallmark of the NFYP. The district development committees (DYT) and block development committees (GYT) have been granted autonomy to make development plans, allocate resources, and make rules and regulations applicable within their jurisdiction. About 25% of the proposed NFYP outlay is earmarked for programs executed by the districts and village clusters. 5. During 2002, effective measures were undertaken to deepen the decentralization process, with special emphasis on devolving local development planning, implementation, and monitoring. To improve the quality and experience of the GYT leadership, a nationwide re-election of gups (leaders of respective GYTs), based on universal suffrage, was held from September to December 2002. Another significant change was that the leadership of DYT, which was formerly a civil servant, became an elected representative. Thus, district administrative and development functions were effectively bifurcated to better respond to the development needs of the respective districts. Through a participatory and consultative process, involving discussions in all 20 DYT and 201 GYT, the National assembly revised and enacted the DYT and GYT Acts in 2002, vesting districts and village blocks with greater administrative and financial powers, including the authority to retain and spend rural taxes for local development. The first draft of the written national constitution was completed in December 2002 and submitted to the King. The constitutional committee is now reviewing the second draft, which is expected to be tabled in the National Assembly for wider discussion. 2. Employment and Human Resource Development6. With labor force participation rate of 56.5%, the 2001 National Labor Force Survey2 estimates the overall open unemployment rate at 1.9% compared with 1.4% in 1998. The urban unemployment rate is estimated at 4.1%, and the rate for rural areas at 0.6%. In the urban areas, unemployment is estimated to be 5.3% for females and 3.0% for males (Table 2).3 In the NFYP, the Government prepared a Human Resource Development Master Plan for Private and Corporate Sectors and allocated Nu3.0 billion, or 50% of NYFP allocation for human resource development, to implement the plan. The master plan aims to achieve the following objectives: (i) enhance the human resource capacities of the corporate and private sectors: (ii) develop a new generation of entrepreneurs; (iii) enhance the competitiveness of Bhutanese products in the domestic and international markets, and (iv) contribute in achieving of the national goals of self-reliance and Gross National Happiness. The NFYP estimates that about 50,000 school graduates will enter the labor market during 2002-2007. Another 20,000 people are expected to come to urban areas in search of gainful employment. Thus, the economy will need to absorb 70,000 new entrants to the labor market over the next 5 years.
7. Currently, there is a skills mismatch between the needs of the private sector and the qualification of the school graduates. In addition, there is an aspirations mismatch: school graduates’ preference for employment is with the Government first, followed by Government corporations, and, only as a last resort, with the private sector. The Government has taken multiple steps to address the situation. In addition to counseling students on emerging market realities, it is focusing on vocational education to correct the skills mismatch between the needs of the private sector and the qualification of school graduates. To make private sector employment more attractive, the Government has drafted labor laws, which will be presented to the National Assembly for approval. In addition, an apprenticeship act is being drafted whereby the Government and the private sector, on a 50:50 cost-sharing basis, will train new entrants in the labor market. Further, each memorandum of understanding signed in the context of foreign direct investment now specifies the number and skills level of Bhutanese nationals to be employed and trained. These measures are expected to address the issue of shortage of skilled Bhutanese workers4 as well as provide a sustainable framework for absorbing new entrants to the labor force during the NFYP period. Box 1: The Power Sector in Bhutan Bhutan’s hydropower potential is estimated to be over 30,000 megawatts (MW). Of this potential, about 1.5% had been utilized as of end-FY2002. The hydropower sector is the single largest source of domestic revenues, accounting for some 45% of Government revenues and a GDP share of about 12%. Inclusive of hydropower-related construction activity, the power sector is the largest component of Bhutan’s industry sector. Of the three in-service hydropower projects, the Chhukha hydropower project (CHP), completed with financial assistance from India with an installed capacity of 336 MW, is the largest, followed by the Kurichu and Basochu hydropower projects. With the commissioning of CHP, Bhutan began exporting power to India, equivalent to about 90% of CHP's generation capacity. During FY2002, CHP sales accounted for 39% of total domestic revenues. Over the past 5 years, revenues from CHP have grown at an average annual rate of 11%. With the completion of its final phase, the Kurichu hydropower project is generating 60 MW. The Basochu hydropower project of 62 MW is phased over two stages. The upper stage of Basochu, with Austrian financial assistance, was commissioned in October 2001 with an installed capacity of 22.2 MW. The lower stage also with Austrian financial assistance, and with an installed capacity of 40 MW, is scheduled for completion in March 2005. Following the successful completion of CHP, the Government embarked on the 1,020 MW capacity Tala hydroelectric project (THP). It is the largest hydropower project assisted and undertaken by India in any country; on completion in June 2005, it would surpass CHP and become Bhutan’s single largest source of domestic revenues. The revenues from this project would not only help meet the gaps in recurrent expenditure, but also contribute significantly towards meeting a part of capital expenditures. The project would also result in increased exports and thus contribute a reduction of the merchandise trade balance. It is estimated that annual power consumption in Bhutan grew at an annual average rate of 9.5% over the past 5 years, giving more than 30% of Bhutanese households access to electricity. With the completion of THP and Basochu lower stage, Bhutan will have an installed hydropower capacity of 1,485 MW, equivalent to about 5% of its potential. The industry will then be contributing about 60% of total domestic revenues. Asian Development Bank (ADB) assistance to the power sector includes support for Government’s rural electrification program and institutional and capacity development for sector restructuring. Consistent with its sector restructuring priorities, in July 2002 the Government separated the Department of Power (DOP) into three agencies: the Bhutan Power Corporation (BPC), the Department of Energy (DOE), and the Bhutan Electricity Authority (BEA). With the new framework, BEA will function as the regulatory body for enforcing rules and regulations and the BPC will be responsible for the utility functions. DOE will remain the planning and policy body of the energy sector. Based on the findings of a technical assistance (TA) to be provided by ADB, the Government will consider establishing the Druk Hydropower Corporation (DHPC) to consolidate all Government-owned power stations as profit centers and to facilitate private sector participation in hydropower generation. In support of the Government’s sector restructuring initiatives, in 2003, ADB intends to also provide a TA grant for strengthening BEA. Under the NFYP, the Government plans to electrify 15,000 households in 20 districts to achieve 100% electrification by 2020. In support of this, ADB is processing a loan in 2003 to electrify about 8,000 households. Sources: Department of Power, Ministry of Trade and Industry; Royal Monetary Authority (RMA). 2002. Annual Report, and Royal Monetary Authority. 2003. Selected Economic Indicators. March. 2003
3. Savings and Investment8. The average annual savings rate over the past 5 years is 17% of GDP, whereas the gross domestic investment rate is 42%. Gross domestic savings (GDS) comprising mainly of corporate savings has fluctuated from –33% to 47% in the last six years with no clear and consistent trend in its growth. As noted in the RMA's 2002 Annual Report, GDS has consistently fallen short of gross domestic capital formation, requiring an average net inflow of about 13% of GDP in the last 10 years. More recently, the savings-investment gap as a percentage of GDP has risen to over 26%, with the latest figure being 29% for 2001. B. Fiscal Developments9. Domestic revenues, which have shown an average annual growth rate of 10.8% over the past 5 years, have consistently been above 20% of GDP during FY1998 to FY FY2002 (Table 3), a performance which compares very favorably with that of other South Asian countries. Tax revenues, which have exhibited an average annual growth rate of 19%, have not shown corresponding buoyancy. The average per annum tax–GDP ratio over the past several years has been stagnant at around 10.5% of GDP, with no appreciable upward trend. With the twin objectives of equity and tax buoyancy, the Government introduced, effective from 1 January 2002, a personal income tax (PIT) applicable on six sources: (i) salary, (ii) rental, (iii) dividend, (iv) interest, (v) cash crops, and (vi) others such as income derived from intellectual property rights. All export earnings in convertible currency of licensed manufacturing industries and licensed agriculture produce exporters are exempted from business income tax. The results of the first year of PIT are encouraging, as actual collections were 85% of the projected target. The Government hopes to collect some Nu120 million for the current calendar year. 10. Direct tax collections in 2002 recorded a 7% growth over the previous year and accounted for 61% of tax revenues and 32% of total revenues. For greater documentation of economic transactions, the Government contemplates requiring the use of letters of credit. Under the present tax structure, dividend income is subject to double taxation, first at the corporate level and again at the personal level. Of the six sources of direct taxation, the largest collection is from the corporate income tax, followed by the business income tax, and royalties. These three tax categories accounted for 94% of direct tax collection and 65% of the total tax revenues in FY2001. While their contribution in the direct taxation category remained at about the previous year’s level, their contribution to total revenue dropped to 57% in FY2002 on account of a decline in income from royalties.
11. Over the years, the Government has maintained a prudent macroeconomic stance, resulting in a surplus on the recurrent budget account. However, Bhutan remains heavily dependent on external concessional assistance to finance its capital (development) budget with India providing about half of all external funding to Bhutan. In the past 5 years, the overall fiscal balance has been negative (Figure 3). It rose from 3.9% of GDP in FY2000 to 11.1% of GDP in FY2001, before declining to 5.5% of GDP in FY2002. The increase in the budget deficit for FY2001 was mainly on account of higher than projected expenditures required to cope with the effects of the August 2000 floods and the loss of revenues due to the flood-related shutdown of industrial activity.
12. In recent years, the Government has resorted to domestic borrowing to close part of the fiscal deficit. Most recent available data suggest that internal borrowings in FY2001 financed 37% of the fiscal deficit. Internal borrowings are in the form of (i) overdraft facility with the 80% Government-owned Bank of Bhutan at 7% interest per annum, computed on a daily outstanding balance basis; (ii) Nu500 million Government bonds, issued in 2001 and rolled over in 2002, with a yield of 7% per annum; and (iii) Nu250 million, 1-year Government promissory note issued in February 2003, with a yield of 7%. 13. On 2 July 2003, the Government presented the budget for FY20045 to the National Assembly. The size of the proposed budgetary outlay represents an overall increase of 3% over the revised estimates for 2003. Compared with the revised estimates, current expenditures are projected to increase by about 3% whereas development expenditures are projected to decline by about 4%. Although during FY2004, domestic revenues are projected to show a modest increase of only 2%, consistent with the past trend, domestic revenues will fully finance recurrent expenditures. As such, there will be a surplus on the budget’s recurrent account. The overall fiscal balance would, however, reflect a deficit equivalent to about 5% of the projected GDP. Excluding expenditures for large energy sector projects, the largest shares of FY2004 development expenditures are earmarked for the development of roads (21%) and health and education sectors (17%). A preliminary review of FY2003 fiscal performance6 indicates a significant drop of external assistance in the first year of the NFYP. Specifically, there was a significant shortfall in external assistance from India, Bhutan’s single largest source of grant financing. Overall, grant assistance from India declined by about 50% compared to the budget estimate. Both program and project assistance from India was lower as compared to the budget estimate; each declining by 60% and 17%, respectively.7 The decline in grant assistance from India was partially offset by a 13% increase in grant assistance by other development partners. As a result of the decline in grant assistance, the resource gap increased substantially, and the overall budget deficit rose from the planned 5% of GDP to an estimated 8.6% of the GDP in FY 2003. C. Monetary Developments and Prices14. Monetary conditions remained moderate with broad money supply (M2) accelerating to 17.6% growth from 5.5% in the previous year (Table 4). As in the past, the surplus on the balance of payments and the consequent rise in banking system net foreign assets were the dominant factors in the expansion of M2. During the same period, narrow money supply (M1) exhibited a slower growth of 12.1% compared with the previous year’s 21.3%. Among the components of M2, quasi money grew at an annual rate of 22.6% compared with the negative growth of 5.7% in FY2001. A rise in time deposits was largely responsible for the increased growth of quasi money.
15. During FY2002, growth in commercial bank deposits with the Royal Monetary Authority (RMA) increased reserve money by 27.9%. Thus, managing excess liquidity remains a key financial sector challenge. Fortuitously, the exchange rate policy––which pegs the ngultrum at par with the Indian rupee––and capital controls ensure that excess liquidity does not act as a destabilizing factor for balance of payments, price stability, and monetary policy. RMA has absorbed some excess liquidity by issuing RMA bills, but this carries a 3% per annum cost to RMA. To dampen the growth of excess liquidity in the banking system and to encourage the banking system to employ its excess liquidity domestically, RMA recently issued a directive prohibiting the opening of fresh deposits across the border. To absorb excess liquidity from the banking system, the RMA raised the cash reserve ratio to 20% in July 2002. Nonetheless, despite a 28% increase in lending to the private sector, as of June 2002, the commercial banks were holding excess reserves with RMA equivalent to about 40% of their assets. 16. As noted in RMA’s annual report of December 2002, the intermediate target for achieving and maintaining price stability in Bhutan is the one-to-one peg between the Indian rupee and the ngultrum. Targeting the exchange rate, however, implies acceptance of India’s monetary policy. As such, an independent monetary policy in Bhutan is more or less precluded. Consequently, monetary policy is confined to the support of the peg, including the following basic measures: (i) ensuring the sustainability of the exchange rate arrangement, i.e., always making available sufficient rupees on demand to exchange for the ngultrum for payments in India and provision of at least 100% reserve backing for all Ngultrum issued (i.e., elements of a Currency Board); (ii) confidence-building measures for the ngultrum; and (iii) sterilizing the persistent growth in liquidity to forestall a possible build up of inflationary pressures, a weakening of the balance of payments, and a contingent effect on the financial market. 17. Latest available data indicate that at the end of 2001, 14 companies were listed on the Royal Securities and Exchange of Bhutan. Their market capitalization of about Nu2.9 billion, reflects an increase of 25% over the previous year. The total shareholder count of 6,610 is low. A key development in the capital market in June 2002 was the floating of shares for the newly opened Bhutan Beverages Company Limited, which was over-subscribed by 2.5 times. In July 2002, an annuity-based, multitiered retirement plan—the National Pension and Provident Fund—was established as an autonomous body governed by the National Pension Board.
18. As measured by the consumer price index (CPI), inflation continued to decline, falling to 2.3% in December 2002 from 2.7% at the end of June 2002 (Figure 4 and Table 5). This is the lowest inflation rate in the past 3 years. As almost all major components in the CPI basket are goods imported from India, the relative low inflation rate prevailing in India has helped maintain a low inflation rate in Bhutan. With respect to the components of the CPI, the annual growth of non-food prices dropped from 4.9% in December 2001 to 3.5% in June 2002, while the annual growth of food prices remained unchanged from December 2001 at 2.2%.
Box 2: Bhutan’s Financial Sector: Issues and Challenges Financial markets and institutions play an important role in economic growth. The financial system in Bhutan consists of the Royal Monetary Authority (RMA), two commercial banks, two nonbank financial institutions, and one pension and provident fund. RMA regulates and supervises the commercial banks and the lending activities of the nonbank financial institutions. The lack of effective competition in the Bhutanese financial sector is due mainly to the small size of the market for financial services and has contributed to high intermediation costs with large spreads in lending and deposit rates. A virtuous circle of economic growth and financial sector development has occurred in the public sector in Bhutan, but not in the private sector. Private savings mobilization is low, as is private sector investment. Among the considerable impediments to private sector growth in Bhutan is the lack of risk appetite of commercial banks; another is the lack of institutions for venture capital funds, particularly for small and medium -size businesses with little or no collateral. Dependence on foreign aid and revenues from hydropower has allowed Bhutan to sustain high levels of consumption and low private domestic savings, and has dampened the desire to promote measures to increase domestic private savings. The reasons for sluggish credit activity in Bhutan include high collateral requirements due to the inadequate legal framework for loan recovery and institutional deficiencies in project appraisal. Emphasis should continue on working with and reducing risks for financial institutions by promoting a sound financial market infrastructure. More needs to be done to enable financial institutions to effectively do their work. This includes (i) promoting a standardized national accounting system; (ii) developing a sound legal system; (iii) improving credit assessment capabilities by creating of a credit information bureau; (iv) changing the ownership structure the banks and nonbank financial institutions and opening up the sector to domestic private banks as well as to both domestic and foreign joint-venture small nonbank financial institutions to bring more competition and diversification to Bhutan’s financial sector. Commercial banks also need to develop more expertise to manage risk and their foreign exchange reserves and liquidity and to diversify their portfolios so that they are not so dependent on particular sectors and borrowers. Banks also need to develop skills to do strategic management and to develop their internal prudential criteria. More needs to be done to link the rural areas in Bhutan with the financial system to help reduce poverty in those areas, and to help fund small and medium -size enterprises. Bringing a large part of Bhutan’s population into the formal monetized economy will help reduce rural poverty. A financial infrastructure that can accommodate small savers, such as post office savings accounts , could provide people in rural areas with savings facilities that can be used for local development. Finally, the key to strong financial institutions is strong prudential supervision. In this context, RMA needs more independence in deepening and strengthening its supervision functions. Source: ADB. 2001. TA 3687-BHU: Financial Sector Review. Manila. D. External Trade, Balance of Payments, and Foreign Debt19. Over the past 5 years, Bhutan’s exports have decelerated at an average annual rate of 2.4%, while import growth has been 9.4% (Table 6). The result is a negative trade balance for the period (Figure 5). The trade balance with respect to India has been negative during the past 5 years. The composition of Bhutan’s merchandise trade shows that India remains its largest trading partner accounting, on average, for some 90% of Bhutan’s exports and about 70% of imports. Power is the largest export item to India. In 2001, power accounted for 47% of total export earnings and 51% of export earnings from India. Besides power, other major export commodities to India are agrobased, chemical, mineral, and base metal products. In 2001, 95% of total export earnings were from India. However, export receipts from India are in rupees and thus are not a source of foreign exchange earnings. Given the one-to-one peg between the Indian rupee and the ngultrum, Bhutanese imports from India are also payable in rupees. Bangladesh is Bhutan’s second largest trading partner, and exports to it accounted for 4.5% of export earnings in 2001. Bhutan’s leading exports to countries other than India consist of vegetables and fruits, minerals, processed foods, textiles, and handicrafts.
20. The trade account deficit decreased from 19% of GDP in 2001 to 17% of GDP in 2002, reflecting an increase in power exports to India and a decline in imports from India as some major hydropower projects neared completion. However, due mainly to a substantial decrease on account of the lower interest income of financial sector assets held abroad, the current account deficit averaged 5.5% per annum over the past 2 years. Continued inflow of external assistance as grants and concessional loans has contributed to (i) financing the balance of payments current account deficits, (ii) buildup of foreign exchange (FX) reserves, and (iii) a positive balance on the overall balance of payments account. Latest available statistics indicate around 8% increase in gross international reserves, from $317 million in June 2002 to $343 million in February 2003. This level of FX reserves was sufficient to provide import cover of some 22 months. Of the total reserves, 78% were in convertible currencies, and the balance was in Indian rupees.
21. The tourism industry, which is almost exclusively run by the private sector and is the single largest source of foreign exchange earnings, has not recovered from the aftereffects of 11 September 2001. Tourist arrivals reached a peak of 7,600 in 2000, but have been declining at a rate of 12% annually since then. Foreign exchange revenues from the sector (Figure7) declined to $9 million for 2001/02. With Austrian assistance, the Government is formulating a comprehensive strategy for tourism development. However, the Government’s objective is not to maximize the number of tourist arrivals, but to increase revenue receipts by increasing the average stay of tourists and only secondarily from a gradual increase in the number of tourists. To improve the enabling environment, the Government plans to replace its existing aircraft fleet with larger aircraft and by establishing a hotel and tourism management institute for tour operators and guides. As per current regulations, private sector tour operators have to charge a minimum fee of $200 per day, per tourist during the high season and $165 per day, per tourist during the low season. Of this gross receipt, Government’s average share over the two seasons is 33%. Currently, two foreign private sector companies are establishing new hotels; these, however, are meant exclusively for high-end market customers. In the NFYP, the Government’s objective is to increase the number of tourist arrivals to 15,000 per year by 2007.
22. Bhutan’s stock of external debt outstanding increased by 23.2% to $292 million at the end of FY2002 (Figure 8). Of this amount, 45% was in the form of outstanding convertible currency debt, reflecting an increase of 22% over the previous year. The balance of debt outstanding was in the form of nonconvertible currency (rupee) loans, which at end-FY2002 registered an increase of 25% over the previous year. Corresponding to the growth in total debt, the ratio of outstanding debt to GDP rose from 49% in FY2001 to 55% in FY2002,8 while the debt service ratio rose to 5% (Table 7).
23. Presently, all external debt of Bhutan is in soft loans or concessional debt. The only commercial loan was procured by the Government in FY1988/99 to purchase an airplane. Repayments on this loan were completed in FY1998/99. According to Government estimates, over 60% of the soft loans (both convertible currency and rupee) have been disbursed to the power sector, and 25% have been shared by agriculture, education, and industry. As of June 2002, India had provided most of the soft loans to Bhutan, with cumulative gross disbursements totaling $216 million, primarily for developing the hydropower sector. India was followed by ADB, the World Bank, and the Kuwait Fund for Arab Economic Development with gross disbursements of $63 million, $36 million, and $28 million, respectively. 24. In a recent assessment of debt sustainability,9 Bhutan’s public debt dynamics appear sustainable under a number of domestic and external shocks. In the baseline scenario, the Government debt-to-GDP ratio is expected to rise rapidly from 58% in FY2001/02 to 80% by FY2004/0510 due to external loans from India that are necessary to complete the Tala hydropower project, but would decline to 63% of GDP by FY2009/10. These generally favorable debt dynamics reflect a combination of high-expected growth, low average interest costs, and moderate primary deficits. As these parameters are subject to change over time, existing prudent fiscal stance should continue. The ngultrum is pegged at par with the Indian rupee and therefore reflects changes in the exchange rate development of the rupee. Between FY1995 and FY2002, the ngultrum depreciated against the dollar by an average of 5.9% per annum. Between June 2001 and June 2002, however, it depreciated by 3.8 % against the dollar.
Box 3: Tourism Development The first official tourists to Bhutan came from the United States (US) after the Royal Coronation in 1974. Thereafter, the Bhutan Tourism Corporation was responsible for all tourist operations till 1991, when the tourism industry was privatized. The Tourism Authority of Bhutan was established in 1991 as a regulatory body. Under the Government restructuring exercise of 2000, the body was reconstituted as the Department of Tourism (DOT). The policy of “high quality, low volume” has been the guiding principle developing tourism industry in Bhutan to ensure the preservation of its environment, culture and value system . However, the enormous possibilities in the marketing of ecotourism products may alter the overriding principle for the industry from “high quality, low volume” to “high quality, low impact.” In a span of 27 years, tourist arrivals have been steadily increasing: from 5,363 in 1997 to 7,600 in 2000. The sector is the single largest source of hard currency earnings for the country, and accounted for gross receipts of $10.5 million in 2000. Of this amount, the share of the Government was about 35%. As a percent of domestic revenues, the share from tourism was 7% in 2000. According to a Government publication, by the end of 2012, tourism will constitute 25% of the GDP, with gross revenue receipts projected to increase by 100%. As of September 2001, 94 registered tour operators directly employed over 500 Bhutanese nationals and 2,000 temporary workers.
In 2002, for the second consecutive year, the tourism industry faced negative growth in the number of tourists and associated revenues. Since the peak of 2000, total arrivals and foreign exchange revenue have declined by 44% and 42%, respectively. Reasons for the decline include the repercussions of 9/11 in the US, the Bali blasts of 2002, and the uncertain security situation in neighboring Nepal which serves as an entry point for a large number of tourists intending to visit Bhutan. In the NFYP, the Government has identified tourism as a priority sector and allocated Nu185 million for tourism development. The plan includes proposals to establish a hotel management and training institute in Thimpu, and develop and promote new tourism products. The Bhutan National Ecotourism Strategy, reflecting collaboration between DOT and members of the Association for Bhutan Tour Operators, was published in November 2001 as a guide for tourism entrepreneurs. The NFYP states that efforts would also be made promote domestic tourism by first examining existing trends and improving public facilities and services at possible places of interest. Sources: Department of Tourism, Government of Bhutan, Royal Monetary Authority (RMA). 2002.
Box 4: Private Sector Development In the Ninth Five Year-Plan (NFYP) framework, the private sector is envisaged to be the engine of economic growth. However, as noted in the NFYP, the private sector continues to face several constraints arising from the small size of the domestic market, shortage of local skilled labor, underdeveloped infrastructure and disadvantages associated with a landlocked country. In the past 2 years, the Government has taken some steps to improve the overall enabling environment for the private sector (see Box 5). However, the private sector sees some specific hindrances in its development, most of which are related to the financial sector. The Committee for Private Sector Development recently forwarded the following issues for the Government to consider/resolve in reviewing and rationalizing financial sector policies:
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