Bhutan: seeking new balance

Bhutan faces economic and geopolitical challenges in the pursuit of “gross national happiness”

Bhutan, a serene Buddhist kingdom with fewer than 780,000 people, nestled in the Himalayas and landlocked between China and India, has long been admired for its unique commitment to “gross national happiness” as its guiding philosophy. But faced with economic challenges, the newly elected government is taking bold steps to pursue an updated framework – gross national happiness 2.0 – for revising the path to sustainable development.

The term “gross national happiness” was coined in the late 1970s by Bhutan’s fourth king, Jigme Singye Wangchuck, who declared that it was “more important than gross domestic product”. The kingdom has since adopted a holistic approach to sustainable development that prioritises well-being and happiness alongside economic growth.

When Bhutan transitioned to a parliamentary democracy in 2008, the philosophy was enshrined in its constitution as a national policy founded on four pillars: sustainable socio-economic development; preservation and promotion of culture; environmental conservation; and good governance.

A gross national happiness index was created, with annual analysis of traditional areas of socio-economic concern such as living standards, health and education, and less traditional aspects including culture, community vitality and psychological well-being. It provides a holistic assessment of the general well-being of the population.

But post-Covid-19, Bhutan faces enormous economic challenges. This is in spite of the fact that the 2022 happiness index showed that 48.1% of the population was happy, up more than 7% from seven years previously, based on a survey of over 11,000 people from Bhutan’s 20 districts.

“On the brink of collapse”

Bhutan’s economy grew at an average of just 1.7% from 2008 to 2022. Last year, total public debt reached a record high 251.8 billion ngultrum (US$3.35 billion), accounting for over 103% of gross domestic product.

In September 2023, foreign currency reserves were depleted to $467.05 million, close to the constitutional threshold that would trigger a ban on non-essential imports. Fiscal deficits rose to 6.7% of GDP, up from 1.8% three years ago.

Half of Bhutan’s population is under 30 years old but youth unemployment surged to 29% even though overall employment was around 5.5%. This has led to a brain drain as professionals emigrate to advanced economies for work opportunities, particularly in the health and education sectors.

Over the past eight years, 64,000 people or nearly 9% of Bhutan’s population have left the country. Between June 2022 and September 2023 alone, 16,000 left for Australia.

Bhutan’s fertility rate has also declined sharply over the last half century. In 1971, it was 6.6 births per woman. In 2022, the rate was down to just 1.8 births per woman.

“Our nation’s economy is teetering on the brink of collapse,” Tshering Tobgay, Bhutan’s prime minister, warned when campaigning for the general election in January. Tobgay, who led the nation for five years before losing at the 2018 election, won the vote this year and called for urgent changes.

In a May interview with CNBC, he explained that gross national happiness 2.0 aims to find a new balance between social and economic progress. “We’ve been extremely cautious, very conservative, so we have lagged,” he said. “Looked at one way, we have not really failed. But seen from the successes of the social progress area, we have failed economically.”

Green city project

The new government plans to roll out a US$6.15 billion budget, the biggest in Bhutan’s history and equivalent to 47% of the 2023 GDP, to pursue various ambitious goals over the next five years. These include doubling GDP by $5 billion, creating 10,000 jobs annually, increasing the manufacturing sector’s contribution to GDP from 6% to 30%, and boosting foreign direct investment from $500 million to $6 billion.

In March, the government unveiled a $180 million economic stimulus package backed by India to alleviate economic slowdown in key sectors like tourism, technology and small enterprises. Several memoranda of understanding and agreements were signed with India covering energy, trade, digital connectivity, rail links and agriculture. An Economic Development Board was established to revitalise Bhutan’s six special economic zones.

Six mega and seven small hydropower projects have been planned to generate additional hydroelectricity to sell to India, with highways and railways built in southern Bhutan to connect the two countries.

Last December, King Jigme Khesar Namgyel Wangchuck announced in his National Day address the Gelephu Mindfulness City project. Located along Bhutan’s southern border with India’s Assam state, the 1,000 square kilometre green city is designated as a new special administrative region to be constructed with a “mindfulness balance” between urbanism and sustainability and well-being.

The new city will serve the dynamic economies of South and Southeast Asia, aimed at attracting foreign direct investments to boost the economy and providing jobs to reverse the youth brain drain. Construction has already started but there is no set completion date.

Tourism remains a key source of foreign exchange income for Bhutan. But the number of international visitors declined sharply to 100,000 last year from over 315,000 in 2019. The government aims to attract around 300,000 arrivals annually while maintaining a “high value, low volume” approach. A new international airport will be built in Gelephu Mindfulness City, and wider roads and more helicopters are planned to improve accessibility.

The sustainable development fee for tourists has been reduced to $100 a day for adults and $50 for children. The money is used to protect Bhutan’s natural environment and provide its people with free education and healthcare.

Wealth fund

Meanwhile, Bhutan’s sovereign wealth fund, Druk Holding & Investments (DHI), has invested $540 million into crypto mining since 2020, financed with loans and bond issuances.

Established in 2007, DHI is mandated to “safeguard and enhance national wealth for all generations of Bhutanese through prudent investments”, according to its website.

The wealth fund’s $3.2 billion portfolio contributes about 40% of the kingdom's revenues and 20% of its GDP. Its holdings include a range of public and private assets, venture capital investments, and shares in 21 local companies such as Drukair, Royal Insurance Corporation of Bhutan, Bhutan Power Corporation and State Mining Corporation.

In an interview with the Sovereign Investment Fund Institute in March this year, Ujjwal Deep Dahal, DHI’s chief executive officer, said that apart from public securities, the wealth fund is investing in five areas: innovation and technology, energy and resources, digital assets, mining and minerals, and infrastructure.

DHI formed a partnership with Nasdaq-listed Singapore company Bitdeer Technology Group in August 2023 to develop a 600-megawatt mining farm for bitcoin to boost the rural economy and jobs. Bhutan’s renewable hydropower reserves make the country ideal for eco-friendly mining.

Bitdeer has one of the lowest cost per bitcoin mined in the industry at $20,000 per coin, far below the global average of $45,000. A closed-end fund was established to raise $500 million from international investors for the project. Mining has already started, with 100 megawatts already operational.

DHI is also tasked with transforming Bhutan into a hub for digital innovation. The kingdom now boasts internet connectivity in all schools and 87% of its population is online, surpassing the global average.

Last October, a biometric-based national digital identity system was rolled out as the foundation for digital transformation to revolutionise the commerce, finance and public service sectors. The digital economy is expected to contribute 10% of GDP by 2034.

Geopolitics

Bhutan sits in a delicate geopolitical position between India and China, two powerful nations with a tense relationship. So it has to tread carefully.

After his election in January, Tobgay announced on X, formerly Twitter, that ‘‘Bhutan is open to business”, which some observers in India perceived as a subtle invitation for Chinese investments to break the kingdom’s traditional dependence on India.

Last October, Bhutan and China signed a cooperation agreement to resolve their long-standing border dispute after 25 rounds of talks. A deal to settle the matter, if struck, is expected to lead to Thimphu and Beijing establishing formal diplomatic relations.

Bhutan rejected India’s proposal to construct a road through the kingdom connecting two of India’s northeastern states, which might undermine its negotiations with China. These developments make New Delhi wary about a potential reshaping of regional dynamics.

It remains to be seen whether Bhutan’s new government can successfully deal with the economic challenges at home and carve out a new path to happiness for its people while navigating the delicate geopolitical balance with its powerful neighbours.

*This article was published in Asia Asset Management’s September 2024 magazine titled “Seeking new balance”.