Report

T RADE IN SERVICES AND SOUTH ASIA: AN OVERVIEW 101
of improving the quality of education. It could be
suggested that the Maldives ought to undertake
commitments in construction, education and tourism
services. Although population wise the Maldives is the
smallest country in South Asia, its market may not be
ignored in view of the highest per capita income it has
in the region and the country is an import-dependent
one. There is already services trade taking place between
the Maldives and other South Asian countries,
particularly with India, Bangladesh and Sri Lanka. For
export of labour from these countries the Maldives
provides an attractive market. Indian hotel companies
have several hotels and resorts in Maldives.
Bhutan
Bhutan is currently negotiating accession to the WTO.
It became an observer in 1999 and has now entered
the advanced stage of accession negotiations. It expects
to become a full-fledged member of the WTO in 2008.
By all measures Bhutan is a small country and its economy
overwhelmingly relies on India. From the studies
Bhutan has assigned to various research organisations
it appears that financial services, telecommunications,
energy, and tourism services are considered important
(Rinchen 2004).
Like many small economies, Bhutan is a highly open
and trade-dependent economy, with trade comprising
65% of its GDP (UNESCAP 2003). Bhutan has also
opened the economy to foreign investments. Under the
present circumstances, it is not mandatory for a business
firm to comply with FDI requirements (Tobgay 2007).
However, in the sectors opened under WTO, all foreign
players would be required to enter through the FDI
channel and contribute to the nation as a national legal
entity.
Although there are several structural limitations
and external sector vulnerabilities, the government has
followed prudent policies to ensure a sound macroeconomic
environment. Bhutan pursues a conservative
fiscal policy (UNESCAP 2003). Domestic revenues have
to cover recurrent expenditures, and capital expenditure
is largely determined by the availability of external
assistance. Various efforts are underway to increase
exports that can earn convertible currency given the
limited diversification of trade. For example, the
government has waived corporate income tax on
income earned in convertible currency for manufacturing
units, information technology industries or
services and agriculture produce.
In December 2002, the government approved the
Foreign Direct Investment Policy (FDIP) with a view
to fostering private sector development, generating
employment, enabling the transfer of capital,
technology and skills, and enhancing convertible
currency earnings (Ibid: 197). In the case of Bhutan,
FDI is understood to be investments made in convertible
currencies only. Prior to this policy, limited foreign
investment was allowed in the banking, tourism and
industrial sectors on a case-by-case basis.
The FDIP sets out the broad parameters for foreign
investors by delineating areas and size of investments,
skills transfer requirements for import of capital goods
must be met out of foreign equity; (b) repatriation of
profits and dividends must be balanced by net foreign
exchange earnings; and (c) repayment of foreign
currency loans will be permitted subject to prior
approval of the loans by the Government. With a
minimum requirement of $0.5 million, the services
sectors open for FDI include: tourism including hotels,
roads and bridges, housing, and education services.
However, foreign investors can hold up to 70% equity
(UNESCAP 2003:197).
ESCAP argues that while the adoption of FDI policy
is significant, it is still deemed conservative (UNESCAP
2003). Bhutan’s main services sectors comprise
construction, transport, telecommunications, tourism
and hotels, and the retail trade. The high growth rates
in the transport and construction sectors are related to
the construction of large hydropower plants in the
country. Publicly funded infrastructure works including
the construction and repair of roads and housing
complexes dominate the construction sector.
Tourism is perhaps the only services sector that may
be of interest to foreign firms in the near future. The
entry of foreign suppliers could have a positive catalytic
impact on the private sector in Bhutan. For example,
foreign banks will be able to provide Bhutanese entrepreneurs
with better services and more sophisticated
financial products. However, it is unlikely that foreign
suppliers will rush to Bhutan’s small services market,
given the limited demand for services and the high cost
of delivery of services (UNESCAP 2003).
Due to the shortage of skilled domestic labour, over
50,000 Indian nationals are employed in Bhutan in the
construction sector. The government, on the other hand,
has adopted strict limits on the number of immigrant
labourers allowed as a result of political obligation.
However, the lack of consistency in government policies
related to labour, taxation and licensing is also perceived
as a constraint by the private sector (UNESCAP
2003).