Overview

  • The Kingdom of Bhutan is a small, mountainous, landlocked country in South Asia, located in the eastern Himalayas, bordered by India and China. Bhutan is home to a population of about 770,000 spread over approximately 38,394 square kilometers, with about 71 percent of its land under forest cover.

    Politics

    Bhutan politics has changed significantly in recent years. In 2008, the country undertook a transition from an absolute monarchy into a constitutional monarchy with an elected parliament. The first elections for the National Council were held on December 31, 2007, while elections for the National Assembly were held on March 24, 2008 and the second Parliament elections were held in 2013.

    Economy

    The government focuses on hydropower, agriculture, tourism, cottage and small industries, and mining as key growth drivers and job creation. A combination of prudent fiscal and monetary policy, as well as robust investments in hydropower contributed to the acceleration of growth from 2.1 percent in 2013 to 6.5 percent in 2015. Inflation was 3.2 percent in 2016 and the exchange rate against the US dollar was mostly stable. The current account deficit increased to 30 percent of GDP in 2015 reflecting large investments related to hydropower projects financed mainly by loans from India. Despite the higher current account deficits, adequate financing meant gross international reserves remained stable, covering 11.3 months of goods and services imports as of October 2016. The fiscal deficit was 1.3 percent of GDP in FY2015/16, and is expected to increase to about 2.5 percent in FY2016/17. The deficit largely reflects an increase in capital expenditures for infrastructure development such as roads. The 2016 WB-IMF joint Debt Sustainability Analysis (DSA) concluded that the risk of debt distress was moderate, which is unchanged from the 2014 DSA.

    In the absence of a vibrant private sector, public-sector jobs are highly coveted among the educated youth, leading to an increasing urban youth unemployment (21 percent in 2010, 23 percent in 2013 and 28 percent in 2015).

    Development Challenges

    The overall macroeconomic outlook is positive but pressures on domestic demand related to hydropower development will have to be managed. The impact of the ongoing turbulence in global financial and exchange markets is expected to remain moderate on Bhutan’s economy, mostly through higher imported inflation and lesser tourism earning in the event of a global economic slowdown. While debt risk is assessed as moderate, the rapid build-up over the recent year cautions against any additional non-concessional borrowing, given that Bhutan’s debt-carrying capacity will only improve in the long run reflecting significantly higher electricity exports when hydropower projects come on stream. Efforts to deepen the financial sector must be sustained to provide the country the basis for financing sound and sustainable development and diversification. Despite remarkable progress in poverty reduction, large urban/rural gaps remain. Queuing for public-sector jobs and high reservation wages among urban youth and widespread informality in rural areas point to significant mismatches in the labor market.

  • STRATEGY

    Bhutan became a member of the World Bank in 1981 and joined the International Finance Corporation (IFC) in 2003 and the Multilateral Investment Guarantee Agency (MIGA) in 2014.

    Country Partnership Strategy

    The World Bank Group’s (WBG) Country Partnership Strategy (CPS) covers the period FY2015-19 (July 2015-June 2019) and is aligned with the government’s 11th Five-Year Plan and organizes its activities under three results areas:

    (i)             Improving fiscal and spending efficiency,

    (ii)           Increasing private sector growth and competitiveness, and

    (iii)         Supporting green development.

    The WBG will finalize its mid-term review of the CPS by June 2017, a review of the progress to date and adjustment to the CPS in the remaining period together with the Royal Government of Bhutan and other development partners.

    Investments

    The World Bank has three projects under implementation with IDA credits: Development Policy Credit 2: Fiscal Sustainability and Investment Climate (US$24 million, until 2018); Second Urban Development Project (US$29 million, until 2019) and Remote Rural Communities Development Project (US$9 million, until 2018).

    To complement the projects with IDA credits, the World Bank also provides support through more than 10 grants / trust-funded activities which are underpinned by Advisory Services and Analytics (ASAs).

    Advisory Services and Analytics (ASA)

    The Bank has provided knowledge to Bhutan through a combination of non-lending technical assistance and economic and sector work.  A number of reports, diagnostics, and studies have been done under the present CPS and helped to shape dialogue with the government in key areas of engagement. The Bank also provides Bi-Annual Economic Update which is shared widely with its stakeholders including the Development Partners. The active ASA portfolio are selected according to one of the 3 following principles: (i) support an ongoing or future operation; (ii) fill a knowledge gap critical for Bhutan’s development path; (iii) strategically position the World Bank.

    International Finance Corporation (IFC)

    IFC has a total committed investment portfolio of US$21 million as of January 31, 2017. The portfolio consists of an equity participation in Bhutan National Bank (BNB), a loan to help finance the refurbishment and expansion of a world class tourist hotel, Zhiwa Ling, and an equity investment to support a hazelnut plantation, nursery and processing operation in the poorer, Eastern part of the country. IFC continues to explore areas of assistance in the hydropower, tourism, manufacturing, agribusiness, health, and education sectors, among others. IFC’s advisory support on investment climate reforms, infrastructure development through PPPs and the financial sector is expected to continue.

    Multilateral Investment Guarantee Agency

    On October 21, 2014, Bhutan became the 181st member of MIGA. In light of Bhutan’s recent membership, MIGA has not provided guarantee coverage for investment in Bhutan to date.

  • Under the current CPS, outcomes have been satisfactory and notable advances have been made in the three results areas.

    Improving fiscal and spending efficiency

    With WBG support, the government has introduced measures to improve revenue and expenditure performance through a fiscal consolidation and prudent debt policy approved in August 2016 and supported by DPC series. Tax collection has improved through a Tax Public Notification that raises custom duties, sales taxes and green taxes on selected items. The Royal Monetary Authority (RMA) introduced a new policy on reserve management in 2015, which allows the RMA to convert hard currency reserves into Indian Rupees. The CPS program is also on track to achieve the targets related to PFM and procurement. The 2016 PEFA Assessment Report shows improvements in PFM over the 2010 assessment including budget credibility, oversight of aggregate fiscal risk and the quality and timeliness of budget reports. The first phase of the electronic Government Procurement (e-GP) system is in an advanced stage of development.

    Increasing Private sector growth and competitiveness

    The private sector in Bhutan is in its early stages of development. Its potential to engage in sectors that are currently dominated by the state is yet to be realized with an appropriate regulatory and policy environment. The government, with the support of the WBG, has taken important steps in formulating policy reforms to simplify business procedures and spur private investment. With the support of the World Bank’s DPC series, a Financial Sector Development Action Plan (FSDAP) was approved in 2016 to address gaps and vulnerabilities in the financial system in a cost effective way. IFC is also providing financial infrastructure advisory services to increase access to finance to Micro Small and Medium Enterprises.

    Supporting Green Development

    The WBG has been supporting the agricultural sector through irrigation schemes to improve crop production, community-led infrastructure activities and advisory services. Progress is moderate in improving irrigation facilities in the poorest and most remote parts of the country. There have been improvements in developing infrastructure in northern Thimphu, with construction completed in two Local Area Plans and work continuing on a third. The CPS target to expand areas under protected area management was achieved. ASAs are underway that are looking into the causes of deforestation and forest degradation, as well as prospects for improved forest management and natural capital accounting. The World Bank is also supporting implementation of a new mineral development policy by carrying out a technical assessment of gaps and outdated content in the current policy in an attempt to promote good international practices. The World Bank has developed a comprehensive and long-term program to support the government in strengthening disaster and climate resilience.

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LENDING

Bhutan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

MULTIMEDIA



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