Bhutan has achieved significant progress in poverty reduction, human development, and economic growth over the past decades, primarily driven by its hydropower sector and human development policies. To maintain this momentum and generate quality jobs for its youth, the country must diversify its economy beyond hydropower and implement agricultural and financial sector reforms, according to a new World Bank report.
The Bhutan Country Economic Memorandum identifies key barriers to higher growth and suggests actionable reforms. It highlights three areas requiring urgent action: facilitating economic diversification by incentivizing non-hydro industries and the private sector; enhancing agricultural productivity through selective crop diversification and certification to access niche markets; and undertaking financial sector reforms to support diversification.
“Economic diversification is crucial for Bhutan to increase resilience, create jobs, and sustain growth. By fostering a business-enabling environment and promoting programs that provide excellent training on targeted technical and professional skills to the youth, the country can attract Foreign Direct Investments and accelerate job creation in key sectors that can support the country’s growth ambitions,” said Adama Coulibaly, World Bank Resident Representative for Bhutan. “Further, Bhutan can leverage its natural capital and international recognition as the first carbon-negative country in the world to boost green resilient and inclusive growth.”
The Covid-19 pandemic and other global challenges have exacerbated difficulties facing the Bhutanese economy. The unemployment rate has significantly increased, particularly affecting urban and educated youth. The relatively small size of the private sector, its concentration in low-productivity microenterprises, and inefficiencies in the labor market have also hindered employment opportunities.
While hydropower has been instrumental in Bhutan's development, its capital-intensive nature limits job creation, employing less than 1 percent of the labor force. Diversifying renewable energy investments into solar, wind, and geothermal could enhance clean energy generation capacity with positive impacts on green growth strategy.
Financial sector reforms are critical to supporting economic diversification. The report suggests strengthening risk management practices and creating a level playing field between state-owned commercial banks and other commercial banks to ensure greater contributions from private finance.
“Financial inclusion is essential for inclusive growth,” said Rangeet Ghosh, World Bank Senior Economist and Co-author of the report. “In Bhutan, digital technologies can play a vital role in promoting financial inclusion by enabling faster and more affordable national and international payment systems, facilitating collateral-free lending, and introducing innovative financial products.”