Bhutan

Bhutan

Bhutan: Market Profile

Picture: Bhutan factsheet
Picture: Bhutan factsheet

1. Overview

The Kingdom of Bhutan is considered a development success story, with decreasing poverty and improvements in human development indicators. Annual average growth between 2006 and 2015 reached 7.5%, which places the country 13th out of 118 countries, far exceeding the average global growth of 4.4%. 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.

Sources: World Bank, BMI Research

2. Major Economic/Political Events and Upcoming Elections

January 2015
John Kerry becomes the first-ever US secretary of state to hold a cabinet-level meeting with a Bhutanese official when he meets Bhutanese Prime Minister Tshering Tobgay in India.

Source: BBC Country Profile – Timeline

3. Major Economic Indicators

Graph: Bhutan real GDP and inflation
Graph: Bhutan real GDP and inflation
Graph: Bhutan GDP by sector (2016)
Graph: Bhutan GDP by sector (2016)
Graph: Bhutan unemployment rate
Graph: Bhutan unemployment rate
Graph: Bhutan current account balance
Graph: Bhutan current account balance

e = estimate, f = forecast
Sources: IMF, World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Bhutan merchandise trade
Graph: Bhutan merchandise trade
Graph: Bhutan major export commodities (2016)
Graph: Bhutan major export commodities (2016)
Graph: Bhutan major export markets (2016)
Graph: Bhutan major export markets (2016)
Graph: Bhutan major import commodities (2016)
Graph: Bhutan major import commodities (2016)
Graph: Bhutan major import markets (2016)
Graph: Bhutan major import markets (2016)

Sources: WTO, World Bank WITS database

4.2 Trade in Services

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

5. Trade Policies

  • Bhutan is not yet a member of the 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 (latest meeting), but progress has stalled due to the resistance of the previous government.

  • 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. 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 United States markets as a Least Developed Country (LDC) through the European Union’s General System of Preferences (GSP) and Everything But Arms (EBA) 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 utilising internationally-recognized 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, BMI Research

6. Trade Agreement

6.1 Trade Updates

In June 2018, the seven-country grouping BIMSTEC 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 among the members of BIMSTEC to advance economic cooperation.

6.2 Multinational Trade Agreements

Active

  • Bilateral Free Trade Agreement (FTA) between Bhutan and India: The FTA 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 Free Trade Agreement (SAFTA): SAFTA is a plurilateral Free Trade Agreement 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; Afghanistan later joined in August 2011.

Under Negotiation

The Bay of Bengal Initiative on Multi-Sectoral Technical and Economic Cooperation (BIMSTEC): BIMSTEC is a plurilateral Free Trade Agreement 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 over 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

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. 100% of 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% of foreign ownership is allowed in the financial services industry, while up to 74% of 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.

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

  4. 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.

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

  6. 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, The International Trade Administration (ITA), US Department of Commerce

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, BMI Research

8. Taxation – 2018

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

Source: www.theiguides.org

8.1 Important Updates to Taxation Information

Bhutan has a double taxation agreement with India.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax30% on net profits
Witholding 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 1800 cc

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

Firms need an 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 7 or 14 days "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, BMI Research

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not ratedNot rated
Standard & Poor'sNot ratedNot rated
FitchNot 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/AN/A
Corruption Perception Index
27/17626/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank190/202
Short-Term Economic Risk Score46.340.842.1
Long-Term Economic Risk Score33.735.335.3
Political Risk Index Rank114/202
Short-Term Political Risk Score616160.4
Long-Term Political Risk Score5157.659.9
Operational Risk Index Rank87/201
Operational Risk Score52.151.451.7

Source: BMI Research

10.4 BMI 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.

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: BMI Research Economic and Political Risk Indices

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Bhutan Score51.744.548.551.262.5
South Asia Average41.643.738.944.039.7
South Asia Position (out of 8)15231
Asia Average48.950.647.747.150.0
Asia Position (out of 35)122415138
Global Average49.849.850.049.349.9
Global Position (out of 201)871321078855

100 = Lowest risk, 0 = Highest risk
Source: BMI 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 Secruity Risk Index
Bhutan51.744.548.551.262.5
Sri Lanka50.045.046.357.751.1
India49.444.651.061.940.0
Maldives48.550.343.440.959.3
Nepal37.940.935.435.539.7
Bangladesh37.750.129.838.932.1
Pakistan34.736.936.844.320.9
Afghanistan22.737.320.121.112.4
Regional Averages41.643.738.944.039.7
Emerging Markets Averages46.848.047.545.846.1
Global Markets Averages49.849.850.049.349.9

100 = Lowest risk, 0 = Highest risk
Source: BMI Research Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Bhutan


2017Growth rate (%)
Number of Bhutan residents visiting Hong Kong1,260-6.0
Number of Bhutan citizens residing in Hong KongN/AN/A

Sources: Hong Kong Tourism Board, BMI Research


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, Hong Kong Immigration Department, BMI Research

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Bhutanese companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

Source: Hong Kong Census & Statistics Department

11.3 Treaties and Agreements between Hong Kong and Bhutan

N/A

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

Bhutanese Honorary Consulate in Hong Kong
Address: Room 2205, Universal Trade Centre, 3 Arbuthnot Road, Central, Hong Kong
Email: enquiry@bhutanconsulate.hk
Hours of Business: Mon-Fri 9:30 a.m. - 12:00 p.m., 2:30 p.m. - 5:00 p.m.
Honorary Consul: Wong Kiam-seng
Tel: (852) 2810 1720
Fax: (852) 2810 8840

Source: www.embassypages.com

11.5 Visa Requirements for Hong Kong Residents

Holders of HKSAR passports must obtain a visa clearance prior the travel to Bhutan.  Visas are processed through an online system by a licensed Bhutanese tour operator directly or through a foreign travel agent.