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Bhutan Policy Notes Summary

Core Content

The government of Bhutan has been actively promoting the development of cottage and small industry (CSI) firms as a key component of its economic strategy. The CSI sector is central to Bhutan's industrial landscape, accounting for 90% of all industries in the country. As of 2018, over 30,000 CSIs were registered, although only about a third were active. The average employment per CSI is low, with 1.9 people per cottage and 6.8 per small enterprise, indicating a sector primarily composed of small-scale, family-based operations. Additionally, the CSI sector is dominated by men, with women more prevalent in service-oriented industries.

Main Challenges

1. Financial Support Limitations:

   • CSIs face challenges in accessing finance due to a lack of collateral.
   • In 2017, financial institutions had less than 1% exposure to the agricultural sector.
   • The Bhutan Development Bank Limited is the primary financial institution supporting CSIs.

2. Policy Implementation:

   • The CSI policy is still in the implementation phase.
   • There is a need for ongoing monitoring and evaluation to ensure effectiveness.
   • Financial inclusion initiatives, such as CSI banking, have introduced new lending norms and interest rate caps, which may require careful oversight.

3. Coordination and Institutional Capacity:

   • Coordination between public agencies and the private sector remains a challenge.
   • The complexity of multi-agency involvement increases the risk of moral hazard.
   • Capacity building and institutional coordination are essential for the success of CSI initiatives.

4. Skills and Training:

   • Skills training must align with labor market demands to avoid misalignment.
   • There is a need to enhance financial literacy among CSI entrepreneurs, particularly in accounting and marketing.

5. Innovation and Market Access:

   • Innovation and technology adoption are underdeveloped in the CSI sector.
   • Access to markets is limited, and there is a need to strengthen marketing and export capabilities.

Key Policy Recommendations

Short-Term Actions

• Continue Policy Support: Focus on financial inclusion, regulatory simplification, and skills enhancement.
• Strengthen Monitoring and Evaluation: Implement a robust M and E framework to assess the effectiveness of CSI policies.
• Enhance Interagency Coordination: Streamline processes and reduce fragmentation through coordination with the MOEA and Ministry of Labor and Human Resources.
• Promote Collateral Flexibility: Allow moveable assets as collateral and develop valuation techniques to encourage borrowing.
• Develop Incubation Centers: Expand support for start-ups and increase their participation in the CSI sector.
• Align Skills Training with Market Needs: Ensure that training programs reflect the actual requirements of the labor market.
• Facilitate Foreign Direct Investment (FDI): Encourage partnerships between FDI and local CSI firms, particularly in agroprocessing.
• Support Brand Bhutan Initiatives: Develop clear regulations and communication strategies to increase CSI participation in national branding.
• Create a Consolidated Inventory: Compile all CSI development programs into a single, organized list for better oversight.

Medium to Long-Term Actions

• Strengthen MOEA Capacity: Enhance the team's ability to support and manage the CSI sector.
• Develop Collaboration Forums: Create more effective platforms for public-private dialogue and cooperation.
• Establish CSI Associations: Promote the formation of industry associations to provide marketing and training support.
• Build Credit Scoring Systems: Introduce credit scoring mechanisms for larger CSI firms to improve their access to formal finance.
• Improve Financial Reporting: Develop a consolidated database for timely and accurate financial reporting by the RMA.

Conclusion

The CSI sector is a vital part of Bhutan's economy, but its development is hindered by financial, regulatory, and institutional challenges. The government's recent reforms, particularly through the establishment of CSI banking, aim to improve access to finance and support entrepreneurship. However, these reforms require careful monitoring, coordination, and alignment with market needs to ensure long-term success and sustainability.