Bhutan’s small and dispersed population and formidable climate and topography make vital infrastructure costly to build and maintain, economies of scale difficult to achieve in service delivery.
The Government’s restructuring initiative of 1999 defined efficiency, accountability, and transparency as the pillars of good governance. The Royal Audit Authority has been strengthened in terms of organizational reach and authority, and an Audit Act is due to be enacted soon. A Finance Act is being drafted. Several new ministries and departments have been created to meet the emerging public service needs.
Since the late 1990s, the king has increasingly delegated governing functions to the National Assembly and the Council of Ministers. The council of ministers, who are elected by the National Assembly, have been delegated full executive authority since 1998, while the post of Prime Minister (who leads the cabinet) is rotated annually among the five ministers who received the most votes. Although the legislative framework is in place, the process of decentralization is still in transition.
As part of Bhutan’s decentralization strategy, tax policy is also changing. Financial powers and responsibilities are being transferred to local development committees (began in 2002). These committees have also been empowered to retain rural taxes and mobilize local financial resources. These changes have required the country to develop new sources of revenue to support its administrative systems, as well as to invest in development infrastructure and social services. Currently, rural taxes account for a negligible proportion of tax.
Bhutan’s good governance and friendly business environment provide it with an important competitive advantage. However, Bhutan has reached a critical point where it could easily lose this advantage. Many important government decisions have been made case-by-case—such decisions as issuing a business license, determining allowable tax deductions, issuing permits for foreign workers, and approving applications for foreign direct investment. While this system has served Bhutan reasonably well, it could become a growing obstacle as the economy expands. The discretion that the system allows could open the door to corruption and certainly to the appearance of favoritism.
Given some capacity constraints, public resources are managed reasonably well in Bhutan, though significant issues need to be addressed. Ensuring the maximum development impact of expenditures from the increasing revenues from hydropower exports will require enhanced fiscal discipline. Moreover, the ongoing process of political and administrative decentralization has led to a paradigm shift in the planning and implementation of development activities, heightening the need for greater transparency and accountability, as well as increased capacity at the dzongkha and geog levels. The royal government needs to improve accuracy and consistency of macroeconomic forecasting to help underpin sound revenue projections and inform policymaking.